By 
Banks have placed another hurdle in front of struggling first-time buyers by increasing mortgage rates for customers with small deposits.
Prospective new homeowners have been among the biggest losers during the coronavirus recession. Banks have withdrawn hundreds of loan deals for borrowers with a 5pc or 10pc deposit, forcing them to scrape together a 15pc downpayment.
However, customers able to save the extra cash now face a new challenge in higher interest rates as banks fear the current housing market boom could be followed by price falls in 2021.
In some cases, borrowers will be forced to pay more than £1,000 in extra interest charges each year because of the higher rates, experts have warned.
Some of Britain’s biggest high street names have altered their mortgage rates in the past few days. Santander has increased some rates for customers with 15pc deposit by 0.3 percentage points while Halifax will charge similar borrowers up to 0.57 percentage points more for the same loan.
Chris Sykes of Private Finance, a mortgage broker, said that a Halifax customer borrowing £202,300 – 85pc of average house price – this week will pay £1,150 more in interest per year compared with the same applicant a week ago.
This is because the bank’s interest rate has risen to 3.12pc, plus a £999 fee. The total additional cost would be about £5,800 over the five year term, Mr Sykes said.
Elsewhere, Virgin Money has announced that its 90pc mortgage rates will increase by 0.5 percentage points while some 85pc loans will rise by up to 0.2 percentage points.
Virgin is one of the few providers to currently offer loans to customers with a 10pc deposit, as the vast majority of these loans disappeared during the spring lockdown.
The stamp duty tax giveaway has sparked frenzy in the property market and increased the demand for all mortgages. Providers are concerned about being deluged from buyers with smaller deposits as they consider them to be high-risk applicants.
Mr Sykes said banks also fear that the market boom may be short-lived and that house prices could fall substantially when the tax break is withdrawn on March 31. Other banks will increase rates in the coming weeks, he said.
“Lenders are operating with extreme caution. They are seeking to increase margins on higher-risk borrowers to account for severe economic uncertainty. We expect to see other lenders follow suit and increase rates for 15pc deposit borrowers," he said.
Mr Sykes said that interest rate rises could soon affect borrowers with much larger deposits, who have been largely unaffected so far.
“The potential for house price drops in the future, with house prices seemingly only growing at the moment, is leading to lenders realising the risks they are taking and charging accordingly for this,” he warned.
Comments