Borrowers will need to find bigger depositNationwide moves to demand 25% for best rates

26 February 2008

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The UK's second biggest mortgage lender has increased the deposit homeowners need to qualify for its best rates to 25% of a property's value.

Nationwide Building Society has decreased the maximum loan-to-value (LTV) ratio people need to qualify for its best deals from 90% of a home's value to 75%.

The move means someone buying an average priced home of £197,244 will now have to find a deposit of £49,311 rather than one of £19,724, or face paying 0.2% more for their mortgage.

Credit crunch

The group said it was introducing the lower LTV because of higher funding costs as a result of the credit crunch.

But its decision is bad news for hard-pressed first-time buyers, as well as those who bought their home during the past couple of years, who will have seen very little increase in its value.

A Nationwide spokeswoman said: 'The cost of funding in the market is higher and the housing market is cooling.

'Like a lot of lenders we have to adapt to these changes. It's to do with the market conditions at the moment.'

Fixed rate mortgages

The move covers both the group's fixed rate mortgages and its tracker ones, and will apply to anyone taking out a new home loan with it.

A homeowner taking out a two-year fixed rate mortgage with a £499 arrangement fee who is borrowing 75% of their property's value will qualify for a rate of 5.85%.

But someone who needs to borrow between 75% and 90% of their home's value will have to pay 0.2% more at 6.05%, while someone borrowing more than 95% of their property's value will have a rate of 6.45%.

Extra costs

This means that someone with an average first-time buyer mortgage of £118,000 will have to pay over £40 a month more if they have a deposit of just 5% compared with if they had one of 25%, or £802 a month compared with £758 a month at the lower rate.

Nationwide's decision is in line with moves by other lenders to increase the size of deposit borrowers need in order to qualify for the best rates.

It also emerged today that Scottish Widows is reducing the maximum amount it will lend to professionals from 110% of a property's value to 100%, meaning that Dunfermline Building Society is now the only lender that will advance more than 100%, offering 110% to professionals and 105% to graduates but only in Scotland.

Lenders last week completely withdrew from the 125% mortgage market, with all six lenders pulling the deal within days of each other.

At the same time, the number of lenders offering 100% mortgages has fallen by nearly a third in recent weeks as banks and building societies become increasingly risk averse.

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