Nationwide, the country’s biggest building society, has restricted new mortgage lending over fears that falling house prices could send borrowers into negative equity.
The mortgage lender announced that it will only offer loans to new customers with at least a 15pc deposit. It fears that borrowers could otherwise end up in negative equity should prices drop in the coming months as is widely expected.
Forecasts for house prices vary but most analysts expect values will fall sharply before the end of the year. Lloyds Banking Group’s worst-case scenario is that prices will fall by 30pc over three years as a result of the financial crunch caused by coronavirus. Nationwide has predicted a drop of 14pc.
Since the start of the pandemic many mortgage companies have withdrawn loans targeted at first-time buyers and others with small deposits.
Nationwide had offered loans to customers with small deposits through its branch network, but has now removed this option for all new customers. Existing customers can still access loans up to 95pc of a property’s value.
Just a handful of mortgage companies now offer loans to customers with a 5pc deposit. HSBC is the only large bank to do so, but has a limited number of these mortgages available each day.
Tiny lender Saffron Building Society is now one of the few to still offer a 95pc loan. Chris Sykes of Private Finance, a mortgage broker, said the situation was “unique”.
“I wouldn’t be surprised if these are gone by the end of the week as they will be absolutely inundated with applications,” he said. “[Saffron] isn’t the quickest lender at the best of times.”
The cost to first-time buyers of this market shift is significant. The average house price is £231,855, according to Government figures. A 5pc deposit would mean customers need to raise £11,593 to get onto the housing ladder but the new rules will force borrowers to pay 15pc of the purchase price 15pc, equivalent to £34,778.
Figures from UK Finance, the trade body, showed that 23pc of all mortgages taken out in the first half of 2019 required a deposit of under 10pc.
Henry Jordan, of Nationwide Building Society, said: “The outlook for the mortgage market and house prices remains uncertain.
“We need to ensure our members can afford their repayments, while doing what we can to protect them from falling into negative equity.”