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With house prices falling in many regions, should anyone take out a 95pc mortgage?

James Connington
Aberdeen is one area where house prices have fallen according to the latest data

Increased competition in the mortgage market is forcing lenders to target riskier borrowers - including those with small deposits.

Mutual lender Yorkshire Building Society is the latest to cut the teaser rates on deals aimed to draw in first-time buyers with little cash to put down.

The mortgage will cost 3.25pc for the two years, with a standard variable rate (SVR) of 4.74pc after the deal period ends. Borrowers will only need a 5pc deposit. 

Compared to the rates available for those with a larger deposit, this remains extremely high. Borrowers with 40pc deposit or equity can pay as little as 0.99pc, for example, for a two-year fixed rate (also with Yorkshire Building Society). At 25pc deposit or equity, the best rates are around 1.16pc.

The danger for buyers with small deposits is two-fold: first, if prices stagnate or fall they could lose what little equity they started with and easily slip into negative equity (where their mortgage is for a larger sum than their house is worth).

Second, where borrowers have no equity they usually struggle to switch mortgage deals. Inevitably they are stuck paying uncompetitive "standard variable rates" rates which are far higher than their starting rate.

And while the best rates on mortgages have sunk to record lows thanks to the Bank of England’s central rate being stuck at near zero, SVRs have actually risen - as this graph shows.

Yorkshire Building Society says it would be able to help "mortgage prisoners" by offering them alternative fixed rate deals even where they had no or negative equity. But there is no guarantee of how competitive or affordable these deals would be.

The problem of "mortgage prisoners" is not new: Telegraph Money has reported for several years on the cases of borrowers who are denied cheap rates. 

How it could go wrong - in pounds and pence

A homebuyer borrows the maximum 95pc of a £200,000 property.

Their monthly payments on their £190,000 loan at a rate of 3.25pc are £935.

After two years this jumps by £159 to £1,094, based on the Yorkshire's current standard variable rate of 4.74pc.

If Bank Rate had increased by then by, say, 0.5 percentage points, Yorkshire's standard variable rate could be expected to have risen to 5.24pc. In this case, the borrower's monthly repayments would climb to £1,150.

If house prices had declined or remained flat, the borrower's opportunity to move to a cheaper mortgage would be slim or non-existent, as lenders do not offer 100pc mortgages to new customers.

While the Yorkshire says it will provide options for those stuck in this situation, many lenders may not. 

House prices: the latest data

In most regions annual house price growth is slowing, according to the latest Land Registry data published earlier this week.

In a minority of areas prices today are actually lower today than a year ago.

Prices in the City of London, Aberdeen and the South Hams area of greater Plymouth are all down by more than 6pc on a year ago, according to the data. The average borrower in these areas who took out a 95pc loan a year ago would now be in negative equity.

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