The risk for buyers with only 5% deposits is two-fold: first, if prices stagnate or drop they could lose what little equity they started with and easily slip into negative equity.
Second, when a borrower has no equity, they usually have problems switching to other mortgage deals. This means they are stuck paying uncompetitive rates, which are far higher than the starting rate.
While the best rates on mortgage deals have dropped to record lows, thanks to the Bank of England’s central rate being near zero, SVRs have actually risen.
Yorkshire Building Society said “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.”
How it could go wrong – a quick scenario
A homebuyer borrows the maximum 95% of a £200,000 property.
The monthly payments on the £190,000 loan at a rate of 3.25% are £935.
After two years this jumps by £159 to £1,094, based on the Yorkshire Building Society’s current standard variable rate of 4.74%.
If the Bank Rate increases by 0.5% during this time, YBS’s SRV could have risen to 5.24%, raising the borrower’s monthly repayments to £1,150.
If house prices declined or remained flat during this time, the opportunity to move to a cheaper mortgage would be slim or non-existent, as lenders do not offer 100% mortgages to new customers.
While YBS has said, it will provide options for those stuck in this situation, many lenders may not.
According to the latest Land Registry data published earlier this week, annual house price growth is slowing in most regions, with prices today, lower than a year ago.
For example, the City of London, Aberdeen and the South Hams area of greater Plymouth are all down by more than 6% on a year ago. This means that the average borrower in these areas who took out a 95% mortgage a year ago would now be in negative equity.
Negative Equity UK are FCA regulated property debt experts. If you have problems paying your mortgage, or have a property in negative equity and need advice, call us today for a FREE Consultation.