Why do lenders want higher deposits now?
You could get 100% mortgages and even 125% LTV or Loan-To-Value, but it was, before the credit crunch began where you did not a deposit at all to get mortgage. In the case of 125% mortgage, you should pay some fees like stamp duty, fees and other moving costs and to cover these fees you can borrow extra cash. The mortgage market was very competitive and the average deal around 90-95% however it was change since then. When the beginning of 2008, lenders have been increasing their lending requirement. They are withdrawing these products and asking for increasingly large deposits from borrowers.
There are two main reasons that banks or lenders want higher deposits now:
1. Negative equity
There was a boom in the property market before the credit crunch. House prices were increasing at an impressive rate. Property becomes a safe investment and make some banks were happy to lend to homebuyer. However, in January 2008 to January 2011 the house prices have fallen around 11.5% from their peak. You can see this data on the Land Registry site on www.landregistry.gov.uk. The average house price is taken from £184,439 to £163,177.
This is the term of “negative equity” and many people have left with it where their house value is lower than their mortgage. As an example, they bought house for £100,000 three years ago and taken out a 100% mortgage. But this value will be lower and their house can only worth around £89,000. If the homebuyer plans to stay in their home for a long time, this situation is no problem because house prices will start increase again, so they can move from this difficult situation.
Aside people problem will increase if they cannot keep up their repayment and the banks has to repossess their house. They can sell the house but of course it may be not enough so they owe the bank a substantial sum. This is one of the main reasons why banks are now demanding bigger deposits because larger deposit makes borrower is less likely fall into the negative equity.
2. Responsible lending
Banks are being more careful to lend. They consider with who they lend and how much people lend. A few years ago, banks or lenders were happy to offer 100% mortgage for amount that were at good multiples of a borrower’s income but since the change in the economy including increased job losses most borrowers cannot afford their repayment.
The last banks that lent to the sub-prime market have been left with toxic debts. Now, whole market is trying to change lending practice to avoid negative equity although it is not just for the benefits of the borrower. There have been many pressures for banks to start lending more responsibility while we see failure of them to successfully ensure borrower could meet repayments. Hence, banks are now lending to customer with large deposit and it make their transaction book is clear and look better.
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