Credit crunch fall-out - higher deposits required for home loans

If you are a first time buyer, if could mean that you might have to find a larger deposit. With average house prices standing at £184,000 in Q4 2007, according to Nationwide Building Society, first time buyers may need to find another £9,200 to meet the requirement for a 10% deposit.

Woolwich calculates that moving in, on average, costs £10,545 plus the 5% or 10% deposit. Presuming an average property price of £184,000, to get the keys of the door you would need to have almost £29,000 in your back pocket!

Size matters, deposit size that is

As the credit crunch forces mortgage lenders to tighten up their lending policy, some have started to pull in their high loan to value ratios and streamline their products. Mortgages with a loan to value (LTV) ratio of more than 100% of the value of the property have started to get thin on the ground and 90% rather than 95% is becoming the norm.

Those with a small deposit are viewed by lenders as being more at risk of defaulting, possibly leading to repossession. That's bad for you, bad for them and bad for the property market in general.

Getting your foot onto the first rung of the housing ladder? Moneyextra can help you compare all UK first time buyer mortgage deals to find you the best rate.

Even if you're not in the market for a new home, the new loan to value percentages could affect you. If you have low equity in your existing home, a high LTV mortgage and are coming to the end of a special mortgage deal, you could find that you have less mortgage choice and be asked to pay a higher interest rate.

Since the beginning of December 2007 some mortgage lenders have reduced the LTV ratio they are prepared to lend at from 95% to 90%, stopped doing 100% mortgages or will only provide them to professionals or will ask for a guarantor. Alliance & Leicester has cut its 95% LTV to 90% and Scottish Widows Bank has reduced the LTV on its graduate and key worker products to 95% from 102%.

Can you really afford the repayments?

Halifax claims that despite the fact that some lenders have cut back on their LTVs, there is still plenty of choice in the mortgage market as long as you have a good income and a clean credit record. The bank is still offering a LTV of 97% for first time buyers and acceptability is based on affordability.

Rather than worrying about falling house prices and negative equity (which, of course, only matter if you are selling), Halifax says you should be thinking about whether you can afford the repayments, whether you have some protection in place should your circumstances change and whether you could meet higher repayments should interest rates increase?

Moneyextra's mortgage calculators can help you work out what you can afford

Mortgages, thousands of them!

Despite some changes to LTV ratios, there are still thousands of mortgages to choose from. However, you will need to put more effort into shopping around to get a good deal right for you. Following the cut in the Bank of England's base rate by a quarter of a percent in December 2007 to 5.5%, some fixed rate mortgages have started to reflect the change and you can get two-year fixed rates under 5%.

Yorkshire Building Society has a two-year fixed rate of 4.95% but you will be asked for a 10% deposit. The product fee is almost £1,995 but you may add £1,800 of this on to your mortgage. The society's first time buyer package has a 95% loan to value ratio. Fixed over five years at 6.49%, its a flexible loan and you can overpay and underpay plus the society will help you pay for some of the legal fees.

There is also, still, a small number of 100% mortgages on the market from lenders such as Bristol & West, Saffron Building Society, Bank of Ireland and Bradford & Bingley. Bristol & West offers a 100% mortgage for 'professionals' and its First Start mortgage takes account of both your income and your parents' income in the income multiple calculation. However, this does mean that your parents are responsible for repayments should you be unable to pay.

Do you need an online solicitor to manage the legal conveyancing for buying or selling? Get a competitive conveyancing quote.

23 January 2008 © Moneyextra.com

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