THOUSANDS of first-time homeowners who bought with a 5 per cent deposit just two years ago could be in negative equity.
This is when you owe more money on your mortgage than the value of the property.
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The popularity of low-deposit mortgages which help first-time buyers get on to the property ladder combined with falling house prices mean many are unable to sell or get a new loan, according to The Daily Mail.
It means homeowners could get stuck on expensive mortgages once their fixed-rate deal expires.
Almost one in five mortgages issues in the first three months of this year – around 38,000 – were with a less than 10 per cent deposit.
Many of these buyers have used the Government’s Help to Buy scheme to get on the property ladder.
It allows first-time buyers to borrow 20 per cent of the property price, or 40 per cent in London, interest-free if they have a 5 per cent deposit.
The loan must be repaid within five years so homeowners often rely on house prices increasing in order to help offset the cost of repaying the cash.
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But house price growth has slowed, with prices falling in London, South East and South West, according to data from the Office for National Statistics.
It also can only be used to buy a new build property, which some experts warn are priced higher than second hand equivalents.
Are you a first-time buyer in negative equity? We want to hear from you. Email: Tara.Evans@the-sun.co.uk
Martin Stewart, mortgage broker and director of The Money Group, said: “We’ve seen a few instances in the South East where clients who purchased a year ago are now having revaluations at least 5 per cent lower than the purchase price”
“It only becomes an issue if the borrower needs to make a material change to their borrowing or wants to move.”
So what can first-time buyers do?
“Property prices tend to rise over time so if you are able to sit it out, and aren’t planning on moving in a couple of years, hopefully values will have recovered again,” Mark Harris, chief executive of mortgage broker SPF Private Clients told The Sun.
“Ideally, borrowers would put down more than a 5 per cent deposit. But if that’s all you’ve got at the time of purchase, trying to overpay each month and chip away at the balance will help lower your loan-to-value.”
Martin Stewart adds: “Some lenders will allow you to book a rate 6 months in advance so if you are worried then taking action sooner rather than later is a good idea.
“Consider a longer term fixed rate to remove future uncertainty. Look to pay off some capital to improve your loan to value and get a better rate.”
In June, we revealed how the Help to Buy scheme has pushed up house prices and helped the rich get on the housing ladder.
When the scheme ends in 2023, it’s expected to have cost the Government around £25 billion.
Last month, we revealed how taking the Help to Buy loan out on the wrong day could cost first-time buyers £4,765.
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