Risky low deposit mortgages hit high not seen since 2008, Bank of England data shows

The proportion of home buyers taking out riskier mortgages with small deposits has risen to a high not seen since 2008, data from the Bank of England shows. The share of new mortgages where the deposit was lower than 10 per cent of the property's value rose to 8.4 per cent in the period April to June this year. This was up from 8 per cent in the previous three-month period, and the highest share seen since 2008. Just a year ago, these riskier mortgages only made up 7 per cent of borrowing. While house prices have cooled off in the last couple of years, steady rises between the end of the 2008 crash and the end of the pandemic saw them far outpace rises in people's earnings. This has left some first-time buyers needing to borrow large amounts to get on the ladder, particularly if they are buying alone, without the bank of mum and dad or in expensive areas of the country. The most recent official statistics show that the median house price of £290,000 in England was 7.9 times the average disposable income, as of the end of 2024. Taking a mortgage with a low deposit leaves the buyer exposed to the risk of negative equity. Risky business: Low deposit mortgages can leave buyers exposed if house prices fallThis is when the value of their home falls below the amount of the mortgage that is secured on it. It can make a property difficult to remortgage or sell until its value rises again. Putting down a bigger deposit provides a buffer against short-term house price falls, as well as giving the borrower access to cheaper mortgage rates. House prices recorded their first annual fall since 2023 in August, according to Lloyds data published yesterday, going down by 0.4 per cent year on year. Were house prices to fall more dramatically, those with highly leveraged home loans could be at risk. Rachel Springall, finance expert at Moneyfacts, said low-deposit borrowing had become 'vital' to the housing market but that 'those who do borrow at the highest ends of the loan-to-value spectrum must be warned about the dangers of negative equity if house prices plummet'.It comes as British lenders increasingly offer first-time buyers bigger mortgages with smaller deposits to enable them to get on the housing ladder. Earlier this month, Coventry Building Society changed its mortgage rules so that eligible customers can borrow six and a half times their salary to get on the housing ladder, and put down just a 5 per cent deposit. It means a single applicant earning the average salary could potentially borrow up to £255,190 to buy a home, and put down a 5 per cent deposit of just £12,273.Under the lender's previous rules they would have required a deposit of £69,173 or 28 per cent. April Mortgages, a lender relatively new to the UK market, gives buyers the biggest loans based on their income. It enables them to borrow seven times their salary. They must earn a minimum of £50,000 per year whether applying as a single or joint applicant, put down a 15 per cent deposit and fix their mortgage rate for at least ten years.Nationwide's Helping Hand mortgage lends six times income. It has a deposit requirement of 5 per cent based on a five-year fixed rate and buyers must earn £30,000 per year if applying alone, or £50,000 jointly.Elsewhere, some lenders are offering zero deposit mortgages where the homeowner starts off with no equity in their property at all. These are aimed at those who earn a big enough salary to get the mortgage they need, but can't save a big enough deposit. Skipton Building Society's Track Record mortgage allows tenants to borrow up to 100 per cent of the value of a property as long as they can show a track record of paying their rent on time and can prove they can afford the mortgage payments.Both of these types of mortgage often have higher interest rates than the borrower would be offered if they had a larger deposit or were borrowing a lower multiple of their salary.Borrowing a large amount in relation to your salary means your mortgage payments will be higher than that of other homeowners, and risks the payments becoming difficult to manage if your circumstances change.The Bank of England figures also reflected rising mortgage rates. New mortgages with interest rates between two and three per cent above the base rate increased from 3 per cent of all mortgages to 3.1 per cent, the highest since the first three months of 2023 when the mortgage market was reeling from Liz Truss's mini-Budget. The base rate is 3.75 per cent and the Bank of England next meets Thursday 17 September to decide whether to hold or change it. The number of mortgages in arrears decreased by 1.9 per cent in the three-month period, the data showed. How to find a new mortgage Mortgage rates have jumped as conflict with Iran has driven up inflation expectations and dashed hopes of interest rate cuts.If you need a mortgage because you are buying a home, or your current fixed rate deal is due to end, you should explore your options as soon as possible. This is Money has a long-standing partnership with fee-free broker L&C, to provide you with expert mortgage advice.Use This is Money and L&Cs best mortgage rates calculator to show deals matching your home value, mortgage size, term and fixed rate needs.Or use L&C’s online Mortgage Finder to search thousands of deals from more than 90 different lenders to discover the best deal for you.Mortgage service provided by London & Country Mortgages (L&C), which is authorised and regulated by the Financial Conduct Authority (registered number: 143002). The FCA does not regulate most Buy to Let mortgages. Your home or property may be repossessed if you do not keep up repayments on your mortgage