Late yesterday afternoon, Virgin Money announced it would pull its small deposit mortgage for new borrowers while keeping it available for existing homeowners switching rate.

It said this was to review its proposition as it observed market conditions. 

With higher rates and squeezed incomes leading economists to predict a 10% fall in house prices, it has been suggested this could spur other lenders to pull these 95% loan-to-value (LTV) deals to protect themselves from borrowers who could fall into negative equity. 

‘Higher LTVs will diminish’

Gindy Mathoon, founder and senior mortgage broker at Create Finance, said: “One lender starts a trend and others then follow suit.” 

He said it was “hasty” for Virgin to do this and noted it “didn’t send out a great message”. 

“This shows they do not have confidence in the market and expect a bleaker outlook, especially around house prices.  

“For Virgin to withdraw their 95% LTV products is a very strange move. Let’s hope this is a trend that is short-lived,” Mathoon added. 

Justin Moy, managing director of ENF Mortgages, said the move was not a total surprise considering the expectations that house prices would drop over the next 12 to 18 months. 

Meanwhile Riz Malik, director at R3 Mortgages, said things were already getting harder for those requiring high LTVs.

He said: “Going into 2023, the options for higher LTV borrowing are going to diminish. I had an offer last week at 90% LTV for a first-time buyer and it was a struggle getting that through. It would have been much easier just three months ago.

“With house prices expected to fall, lenders will be looking to limit their risk, especially for borrowers with small deposits. Those still in the market will want a premium as competition decreases.”

‘5% too small a cushion’

Paul Neal, mortgage and equity release specialist at Missing Element Mortgage Services, explained that as rates increase, so does the risk for lenders.  

“Lenders, understandably, are also concerned about falling house prices, which again exposes them. As a result, we may see a number of lenders follow suit as the purse strings tighten and the cost of living becomes more expensive. A growing number of lenders may start to see 5% as too small a cushion in the current economic climate.” 

But for Graham Cox, director at Self Employed Mortgage Hub, this could actually be a positive for borrowers with a small deposit. 

He said: “If you lose your job and can’t keep up with the mortgage payments, not only will you lose your home, but if the lender can’t recover the full loan amount when selling the property at auction, they’ll continue to pursue you for the difference. Not nice.” 

‘More about managing workloads’

Craig Fish, founder and director of Lodestone Mortgages and Protection, said if more lenders followed the decision of Virgin Money, this would have a “dramatic effect” on first-time buyers with a small deposit. However, he said this may not be a market-wide issue. 

He said: “You’ve still got the likes of Nationwide who are in fact reducing rates at this level of deposit. I think there’ll be greater visibility going into the New Year and believe that this move is more about managing workloads than a lender running for the hills.” 

Rhys Schofield, managing director of Peak Money agreed, saying: “One swallow doesn’t make a summer and Virgin conducting some pretty regular repricing doesn’t spell the end of the 5% deposit market.” 

Schofield said it was “pretty likely” that houses prices would decline next year but said that was not as scary given the context of 20% increases over the last two.  

He added: “That will mean looking at how products are priced, but that doesn’t mean lenders are pulling out of high loan to value lending.”  

Meanwhile Lewis Shaw, owner and mortgage broker at Riverside Mortgages, was also unconvinced this could have a ripple effect on the market. 

He said: “It’s something and nothing. It would be notable if every lender withdrew their 95% LTV products, or if it was Halifax and NatWest. This is nothing to worry about, and Virgin will be rebalancing its lending book. Nothing more, nothing less.” 

Related: End of Help to Buy: 10 alternatives for first-time buyers.