First-time buyers will be locked out of the market ‘by next year’

First-time buyers face a credit crunch after nervous lenders pulled more than half of mortgages requiring a small deposit in the past two weeks.

Mortgage brokers warned buyers with a 5pc deposit would be locked out of the market by next year as banks and building societies shun “riskier” borrowers.

The number of deals for such borrowers has already more than halved since the day before the mini-Budget last month, falling from 298 to 129.

Since interest rates began to rise in December last year, the number of 5pc deposit mortgages has shrunk by 63pc.

Lenders also pulled deals for remortgagers and those with larger deposits, but the drop was less pronounced – falling 46pc compared with 57pc in the first-time buyer market.

Some banks have launched new deals for safer borrowers but the number of 5pc deposit loans continues to fall.

Mike Staton, of broker Staton Mortgages, said falling house prices because of the mortgage crunch meant those with 5pc deposit loans risked falling into negative equity.

Mr Staton said: “It's an uncertainty many lenders just won’t be willing to gamble on and the easiest way to avoid this risk is to not loan to them in the first place.

“Having talked with several people from different building societies over the past week or so, they think 5pc deposit mortgages will be withdrawn completely.”

Similar scenes unfolded during the pandemic when lenders shunned first-time buyers and withdrew all 5pc deposit loans, except for a small number of specialist lenders.

It took a year for banks to regain confidence, partly buoyed by the Government’s 95pc mortgage guarantee scheme. But the state-backed loan scheme, which ended in December, has not been enough to prevent another exodus from the market.

Graham Cox of the Self Employed Mortgage Hub, a broker, said further Government intervention was needed to protect first-time buyers in the coming months.

He added: “Without something, it's a nailed-on certainty that lenders will withdraw their 5pc deposit mortgages.”