Virgin Money pulls first-time buyer mortgages as house price falls loom

mortgages

First-time buyers face being locked out of the market next year after Virgin Money became the latest bank to stop lending to borrowers with small deposits.

The lender has “temporarily” pulled all mortgages requiring a 5pc deposit and Help to Buy deals for new borrowers.

Mortgage choice for first-time buyers has shrunk by more than 40pc since the mini-Budget in September caused interest rates to soar and nervous lenders to shun “riskier” borrowers – the number of deals requiring a 5pc deposit has fallen from 283 to 159.

The mortgage market has calmed in recent weeks, with some lenders now reducing rates for borrowers with bigger deposits, but now house price falls loom.

Homeowners with small deposits are most at risk of negative equity and widespread forecasts of double-digit price falls in the coming years are expected to force first-time buyers into a credit crunch.

Samuel Mather-Holgate, of mortgage broker Mather and Murray Financial, said 5pc was a “wafer thin layer of equity” in a falling property market.

He said: “I would expect to see the end of these types of mortgages for the next 12 months. Considering some economists think the worst-case scenario could be a fall in house prices of up to 30pc, I am surprised that 10pc deposit mortgages are still available.”

First-time buyers who can still get a mortgage will pay a premium. The average borrower with a 5pc deposit will pay 6.36pc for a two-year fixed deal, up from 5.54pc at the beginning of October, according to analyst Moneyfacts.

Rates for first-time buyers have fallen slightly in recent weeks, down from 6.59pc for a two-year deal at the beginning of November, but are still significantly inflated when compared with the same month last year, when the average rate was 3.22pc.

Gindy Mathoon, of broker Create Finance, warned other lenders would likely follow suit in withdrawing from the first-time buyer market.

Mr Mathoon said: “This shows Virgin does not have confidence in the market and expect a bleaker outlook especially around house prices.

“We've seen interest rates decrease over the past few weeks, which has probably seen borrowers reignite their desire to purchase a home as funding has started to become cheaper than it was six to eight weeks ago.”

A Virgin spokesman said it was “monitoring market conditions closely” and existing borrowers could still remortgage with a small down payment.