Low deposit deals and falling house prices lead to more “mortgage prisoners”

May 25, 2017 by Brendan O'Neill

Lenders

Lenders have recently been targeting customers who present a higher risk, thanks to the increased competition in the market. This includes lending to borrowers with a low deposit.

The latest lender to draw in first time buyers with a low deposit is Yorkshire Building Society, which is offering a fixed rate deal for two years, at a rate of 3.25%. However, after the deal ends the borrower will be placed on the Standard Variable Rate (SVR), which is 4.74%.

The deposit required to qualify for this deal is 5%. The rates are far higher for this deal than for those borrowers with a larger deposit. This could lead to the borrowers becoming “mortgage prisoners”.

When a buyer has a low deposit, there is a greater chance of falling into negative equity if house prices fall or stagnate. Where there is very little equity in a property, the buyer may struggle to swap to another mortgage deal. This may result in paying the SVR, which is generally far higher than a fixed rate. Although the Bank of England interest rate is close to zero, SVRs have actually increased.

According to the Yorkshire Building Society, it would offer customers an alternative fixed rate product, even where there was negative or no equity. However, there is no guarantee that the alternative deals would be competitive.

Mortgage advisors spend time studying on a CeMAP course, so that they are able to advise customers of suitable deals for their circumstances, which will include appropriate deals for those with a low deposit.