Mortgage lender sets 15% level to help protect customers from negative equity
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One of Britain’s biggest mortgage lenders, Nationwide, is to triple the minimum deposit that first-time buyers must put down as it braces itself for falling house prices and the possible return of negative equity.
Nationwide said from Thursday it will withdraw all its new loan deals where the first-time buyer only puts up a 5% deposit and set a new minimum deposit of 15%.
The rise represents a dramatic increase in the amount that buyers will have to save to buy the average home. According to Nationwide’s house price index, the average UK house price is £218,902 – which means a buyer will have to stump up a minimum deposit of at least £32,835 compared with £10,945 before.
Nationwide said it was making the move to protect new customers from being trapped in negative equity. That happens when a borrower takes out a mortgage with a small deposit, only to find that as house prices fall, the mortgage becomes more than the value of the property.
Henry Jordan, the director of mortgages at Nationwide, said: “As a responsible lender, Nationwide needs to ensure borrowers can afford mortgage payments and are, as much as possible, protected against the potential for negative equity, should house prices decrease … Our priority at this time must be to help members keep their homes.”
Nationwide’s decision to cap its maximum loan-to-value (LTV) at 85% comes only weeks after its data revealed a plunge in house prices across the UK in the wake of the coronavirus pandemic.
It said that in the month to May house prices fell by 1.7%, the biggest monthly fall since February 2009, when Britain was in the grip of the financial crisis.
First-time buyers hoping that other lenders will give them a low-deposit mortgage are likely to be disappointed. Nationwide’s move follows a string of market withdrawals by smaller lenders last week.
The tiny Saffron building society remains one of the few lenders that will still offer a 95% LTV – but the broker Chris Sykes of Private Finance said: “In honesty, I wouldn’t be surprised if these are gone by the end of the week as they will be absolutely inundated with applications.”
The Nationwide announcement will be a major blow to England’s property market just as it has begun to pull out of the Covid-19 lockdown.
A month ago the housing market in England was given the green light to reopen after seven weeks of lockdown. However, property professionals warn that if first-time buyers cannot get mortgages big enough to buy homes, then the property market will stall and prices will fall.
Economists are sharply divided about how far house prices will be affected by the coronavirus. The Centre for Economics and Business Research predicted in May that 2020 prices would be down by 13% “as a lack of transactions, high uncertainty, and falling incomes take their toll”. However, the estate agent Savills said the hit to the market could be more like 7.5% and a third of valuation surveyors are predicting that price falls could be limited to 4% or less.
Nationwide said the 15% minimum deposit would apply to all new house purchase, remortgage and first-time buyer applicants.
Buyers who can put up a 40% deposit will benefit from a small drop in its fixed rates, which will fall by 0.1% to 1.09% on a two-year deal or 1.4% on a five-year fix.
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