First-time buyers lacking a sizeable deposit will no longer be able to secure a mortgage deal. Abbey, Britain’s third-biggest lender, is the last big bank to abandon 100 per cent mortgages – loans that cover the entire purchase price of a property.

Many lenders are striving to protect margins during the credit crunch by increasing mortgage rates and narrowing their lending criteria.

To be eligible for a mortgage deal the average first-time buyer must now save nearly £7,500 for a 5 per cent deposit on the £148,000 cost of an average first home. They will also have to pay hundreds of pounds in arrangement fees plus nearly £1,500 for stamp duty. There are fears that this could further depress the housing market as the number of first-time buyers slumps.

Homeowners who have taken out a 100 per cent deal in recent years will also be badly hit by the move. Those who have not built up between 5 per cent and 10 per cent equity in their home will face a huge rise in repayments as they will be unable to shop around for a new mortgage deal.

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Many such borrowers will be forced to pay their lender’s expensive standard variable rate (SVR). The average SVR is about 7.5 per cent and Abbey’s stands at 7.34 per cent. A borrower who took out the best 100 per cent two-year deal for a £150,000 loan in 2006 will be paying about £881 a month for their home loan. If they move to the average SVR, they will have to find an extra £2,640 a year to cover the cost. The spectre of negative equity is also looming. More than 75,000 households could be plunged into negative equity this year, according to research from Experian, the credit reference agency.

Nationwide has forecast that house prices will fall by 5.8 per cent this year.

Melanie Bien, director at Savills Private Finance, the mortgage broker, said: “The liquidity squeeze is encouraging lenders to opt for low-risk business over higher risk, and that means attracting lenders with big deposits or significant equity in their home at the expense of those without.”

The move came as Barclays, the seventh-biggest UK lender, withdrew most of its popular fixed-rate deals from the market. Woolwich, the mortgage arm of Barclays, said that some of the deals would be reintroduced on Thursday, but the interest rates are likely to be higher. Last week First Direct, the online arm of HSBC, withdrew all its mortgages.

Abbey, which is owned by Santander, the Spanish bank, is also set to increase its tracker mortgage rates by up to 0.35 per cent. It will also cut the maximum loan available to borrowers who offset their savings against their mortgage from £7.5 million to £550,000. It introduced its 100 per cent deal only ten months ago. At that time it told brokers: “We recognise that many of your clients cannot afford to provide a deposit. Abbey’s new 100 per cent mortgages provide a solution to this.”

Two years ago, hard-pressed borrowers could choose from more than 120 deals offering 100 per cent of the value of a property. Those who wanted extra cash to help to pay legal fees could choose from 38 deals offering 125 per cent. Now, only borrowers around Birmingham can apply for a 100 per cent deal with Tipton & Coseley Building Society. The remaining 100 per cent deals are available only to those whose parents put up their own home as collateral.

Borrowers in Northern Ireland are luckier: First Trust, Northern Bank and Ulster Bank still offer 100 per cent deals for buyers and homeowners.

From dream home to house of horrors

1 First-time buyer takes out a 100 per cent mortgage deal paying £881 a month for £150,000 loan

2 House prices rise, but then start to fall, eroding equity

3 Credit crunch prompts lenders to withdraw mortgage products (for more than 95 per cent of value of property)

4 Mortgage deal ends, homeowner has too little equity to get a good deal

5 Forced to pay an extra £220 a month on lender’s expensive standard rate

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