One in 20 first time buyers could find themselves trapped in negative equity as house prices fall, according to new research.

They risk being ‘imprisoned’ in their properties for at least three years before they can afford to trade up, said the survey by financial website Fool.co.uk.

It found that about 5 per cent of first-time buyers, or about 20,000 people a year, take out 100 per cent mortgages, where they borrow up to the full value of the property.

If house prices fell, they would end up in negative equity, where the amount they owed on their mortgage was greater than the value of their home, and would be unable to sell.

Halifax said last week that house prices dropped by 0.6 per cent in September – the first monthly fall for nine months.

Prices are still up 10.7 per cent year on year, so anyone who bought more than 12 months ago is unlikely to be out of pocket.

However, analysts expect growth to slip to about four to six per cent by the end of the year and flatline next year. With the market already stagnant in many parts of the country, and asking prices at some estate agents down 20%, few analysts would rule out widespread, albeit modest, price falls.

In a stagnant housing market, first-time buyers on 100 per cent repayment mortgages could find that they have around 3 per cent equity in their homes when their current deal ends, according to Fool.co.uk.

It could take as long as 34 months to build a 5 per cent equity stake in their homes and considerably longer if house prices fall.

They would need to have at least five per cent to get a standard mortgage deal, as the number of 100 per cent schemes is likely to dwindle as lenders tighten their criteria in the light of the credit crunch.

David Kuo, head of personal finance, at Fool.co.uk said: “Borrowers on 100 per cent mortgages need to be aware that stagnant house prices may keep them shackled to their uncompetitive lender and prisoners in their own home until house prices rise again.

“However, they can tip the scale in their favour by ensuring that they choose repayment mortgages rather than the cheaper interest-only options. They should also overpay their mortgage as often as they can afford. This will ensure that they are regularly chipping away at their debt. And with more equity in their homes, their choice of mortgage providers improves too.”

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