First time buyers deposit challenges

Adele-Cowgill-Chartered-Independent-Financial-Adviser

Article by Adele

The ‘loan to value’ often referred to as LTV is the maximum amount that a bank or building society (the lender) will lend to a customer on a mortgage to purchase a property as a proportion of the value or purchase price (whichever is the lower).

Typically, the LTV percentage for first time buyers has been 95%, this has been higher prior to the credit crunch, where one lender in particular, Northern Rock would lend in excess of 100%. A 95% LTV means that the borrower needs to provide 5% being their deposit to complete the purchase.

However, Nationwide the UK’s biggest building society has lowered the maximum to 85% which will require first time buyers to need three times the amount of deposit.

The reason the upper limit is being compressed is due to the impact of the coronavirus crisis and twofold.

First, it is anticipated that there will be a fall in house values which could result in homeowners finding themselves in negative equity. Negative equity is when the outstanding amount owing is greater than the value of the property. For example, should you have recently bought a property for £100,000 with a 95% LTV mortgage and house values fall by 10% then your mortgage outstanding will be £95,000 but the value of the property is now only £90,000.

Should the borrower continue to meet the monthly contractual repayments then any potential negative equity is deferred to the future, at which time we would hope the property market has recovered and negated any potential negative equity position.

The second reason is where issues potentially may arise if the borrower us unable to make their repayments. The probability of this is increasing with the rumours of redundancies and market conditions.

Should the lender, as a last resort, need to repossess a property the equity is their headroom for clearing the amount of the outstanding borrowing and costs incurred for repossession. Generally, repossessed properties tend to end up as auction sales where their true potential value is unlikely to be attained resulting in a loss for the lender.

Top and bottom – lenders don’t like to lose money so to mitigate that risk, they reduce the potential of being put into a position in the first place. This isn’t good news for first time buyers but hopefully it will be a short term position.

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