Aspiring homeowners with low deposits had a torrid year in 2020, as deals vanished from the market and rates shot up.
However, experts have now said there are reasons for optimism in 2021 as lenders return to the market.
According to figures released by comparison site Moneyfacts, there are now around 160 deals available for home buyers looking to purchase a property with a 10 per cent deposit, down from 779 in March.
The average two-year fixed deal has also risen to 3.65 per cent, up from 2.57 per cent.
Those hoping to buy a property with a 10 per cent deposit face limited choice and higher costs than they did before the pandemic, but experts are predicting a rosier picture in 2021
That means for the average person buying a £200,000 home with a 90 per cent mortgage on a two-year fixed deal, over a 30-year term, the monthly cost would be £914.92.
For that same person buying in March, their monthly costs would have been £797.54.
Despite a bleaker outlook for borrowers without hefty deposits, mortgage experts have said there is reason to be cheerful as lenders appear to be returning to the market, encouraging others to follow suit.
‘Numerous high street lenders have now launched deals into the 90 per cent market with the likes of Halifax, Barclays and NatWest all returning,’ said David Hollingworth of L&C mortgages.
‘That should encourage other lenders to come back, whilst the extended choice and capacity will help allay any fears of being knocked over from a service point of view.’
This increased competition could also begin to force down rates, as lenders vie for customers.
‘With major lenders such as Nationwide and TSB beginning to make cuts, we expect others to follow as lenders pitch for business,’ said Chris Sykes, mortgage consultant at Private Finance.
‘Providing there are no major shocks to the economy or housing market, rates will continue to fall – but it will take a while to reach pre-pandemic levels.’
What about 95 per cent mortgage deals?
Buyers requiring a mortgage to cover 95 per cent of the purchase price have faced an even bleaker reality check this year, and they may have to wait a while for things to improve.
In March there were 391 available deals, but now there are just eight. The average interest rate on a two-year fixed deal has also risen from 3.26 per cent to 4.44 per cent.
The eight deals available are reserved for borrowers with additional financial support, such as those with guarantors.
‘It looks likely that the options for those with only a five per cent deposit to put down will take time to emerge,’ said Hollingworth.
‘The market has generally been limited to deals relying on parental support and security, and with lenders only [recently] considering 10 per cent deposits it doesn’t look as though there will be an imminent rush to extend to those with 5 per cent deposits.’
Positive market forces such as house price rises, the Covid vaccine and now the Brexit agreement may encourage banks to offer 95 per cent mortgage deals in time, according to Andrew Montlake, managing director of Coreco mortgage brokers.
‘If Brexit does not appear to be too bad now there is a deal agreed, and the Covid-19 vaccines prove to be effective, this will give lenders more comfort,’ said Montlake.
However, he agreed that any rate changes would be a long way off.
‘Lenders will wait to see what the economic fall-out will be from the pandemic, especially where jobs are concerned,’ Montlake said.
‘Whilst I do not expect to see any kind of price falls on the whole, house prices are likely to remain stable so I suspect lenders will bide their time on 95 per cent mortgages for some time yet.’
Will restrictions on self-employed and furloughed workers be lifted?
Apart from cutting deals and raising rates, 2020 saw lenders exclude swathes of borrowers from mortgage deals.
For first-time buyers, mortgages deals have often been restricted to specific areas of the UK based on postcode, with others only available through selected intermediaries.
Self-employed borrowers have been asked for bigger deposits and additional paperwork. Some lenders lowered the amounts they could borrow and subjected them to longer waiting times and more frequent and rigorous questioning.
In addition, a number of lenders tightened lending criteria by excluding those on furlough and ignoring bonuses and commission.
But according to experts, some of these criteria could be eased in 2021.
‘It will be interesting to see if there is any deregulation as such after we have left the European Union with politicians keen to do what they can to encourage responsible home ownership,’ said Montlake.
‘In the second half of the year, we will see some return to normality with lenders easing some of their pandemic criteria.’
‘We should therefore see higher levels of first-time buyers and the self-employed able to get back into the mortgage market.’
