UK banks are withdrawing their first-time buyer mortgages

Low deposit mortgages, which tend to be popular with first-time buyers, are dropping from the mortgage market 

Getting onto the property ladder just got even harder. In the wake of the mini-budget, which was presented by former chancellor Kwasi Kwarteng last month and caused chaos in the UK mortgage market, the number of low-deposit 95% mortgages on sale has dropped by more than half.

As a result of years of rising average house prices (which hit a record high of £371,158 in October according to Rightmove), a 95% mortgage, requiring a deposit of 5%, is often an attractive option for first-time buyers.

Last year, the government introduced a new guarantee scheme encouraging mortgage lenders to offer 95% deals, subject to the usual checks.

According to the financial monitoring website Moneyfacts, there has been an almost 52% drop in the number of these mortgages available since Kwarteng’s mini-budget, and a 61% decrease since December last year. 

Just 137 95% mortgages were available for new buyers on Monday (24 October) compared with 283 available on 23 September, the day of the mini-budget. On 1 December 2021, meanwhile, there were 353 options available.

What’s behind this vanishing act? The UK’s mortgage market has been in flux since September, when Kwarteng’s mini-budget (which included since-discarded measures like getting rid of the top rate of tax for high earners) sparked concerns about the country’s economic stability.

A sharp rise in gilt yields, the interest paid on government loans, made it difficult to set lending rates, and mortgage providers started pulling their products from the market in droves.

Although most of the measures in the mini-budget have since been rejected by the new chancellor, Jeremy Hunt, and the majority of lenders have returned to the market, there are still significantly fewer deals available, and interest rates have reached a 14-year high – with average two- and five-year fixed rates hitting 6.65% and 6.51% .

According to Moneyfacts, the total number of mortgage deals available in the UK is now at 3,067, significantly lower than 3,961 on the morning of Kwarteng’s statement, but up from 2,258 at the start of October. 

With the markets still in a state of uncertainty, it’s perhaps unsurprising that lenders are moving away from the 95% mortgage, which might seem too high risk (not least because of the risk of negative equity, and the fact that the government’s current guarantee is set to come to an end in December). Indeed, at the start of the Covid pandemic, the number of low-deposit mortgages dropped significantly.

But if thoughts of deposits and mortgages still seem a long way off, how will this news impact you? The rental landscape will be affected by a potential bottleneck of would-be buyers, who are forced to remain as tenants, exacerbating the sector’s supply and demand problem.  

“Getting on the housing ladder is ferociously expensive, and the situation has deteriorated in recent weeks as cheap mortgage deals have been pulled from the market and interest rates have gone up,” says Laura Howard, personal finance expert at Forbes Advisor. “Inevitably, first-time buyers will be struggling even more in this market, both in terms of getting enough money together for a deposit and then forking out for the monthly payments.

“That means some will simply have to bide their time because they can’t afford to move from their existing accommodation, very often a rented property. But if fewer people are moving away from the rental market, that increases demand and pushes up competition for available lets – and pushes up rent prices as well. Talk to any would-be tenant and you very soon hear tales of landlords opening bidding wars for monthly rents and commanding payments of several months’ rent in advance.”

This “additional pressure on the demand for rented homes” and “upward pressure on rents” is likely to impact the south of England most, as “the costs of buying are higher and the income required to buy is greatest,” says Richard Donnell, executive director of research at Zoopla.

However, it’s possible that the recent shake-up at Downing Street could stabilise the market. “Mortgages became more costly when interest rates increased on the back of money-market alarm at Liz Truss’s economic policies,” Howard says. “Now that she has been replaced as prime minister by Rishi Sunak, we’re seeing a shift in policy that has had a calming effect on those troubled markets, and which could see the re-emergence of more affordable mortgages.

“That’s not to say getting on the housing ladder will become significantly less expensive any time soon, but it might make it more realistic for some renters who want to buy their own home.” 

Images: Getty

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