If the Help to Buy 2 scheme ends in December as planned, where does that leave first-time buyers and the high-LTV market?
First-time buyers are the lifeblood of the mortgage market but could lenders be about to restrict their circulation?
A recent 16 per cent fall in the availability of 95 per cent LTV mortgages, coupled with the upcoming end to the Government’s Help to Buy 2 scheme, has led to fears about the long-term health of the sector.
Figures released jointly by Moneyfacts and AmTrust International, Mortgage and Special Risks show a decline in the number of 95 per cent LTV products in the market between March and August, from 270 to 225. However, the number of available products remains significantly higher than the 195 in August 2015. So should we be worried about this drop?
AmTrust commercial director Simon Crone says, if the trend continues for the rest of the year, there could be cause for concern.
“Lenders appear more risk averse post Brexit, which is understandable,” he says.
“However, if we are to marry up the apparent ambitions of the Government, in terms of increasing homeownership and in particular upping the number of first-time buyers, we will need significant levels of lending at higher LTVs. But if the products are not there, these targets won’t be met.”
He continues: “Added to this is of course the uncertainty, not just about the UK leaving the EU, but specifically about what happens to high-LTV product numbers and appetite when H2B2 finishes at the end of this year.”
The latest figures from the Bank of England show a slight upturn in business between 90 per cent and 95 per cent LTV. In the second quarter of 2016 it accounted for 3.8 per cent of lenders’ new business – up from 2.5 per cent in Q1 and from 3 per cent in Q4 2015. However, it is still down on the 4.2 per cent of Q2 2014, just after H2B2 was introduced.
Products backed by the scheme currently comprise a third of all 95 per cent LTV products on the market.
Number of residential 95% LTV mortgage products; comparison figures year-on-year (Moneyfacts.co.uk)
Spicer Haart and Just Mortgages group operations director John Phillips has noticed a slight dip in the number of products at 95 per cent LTV.
“I attribute this to lenders trying to be more competitive in the 50-60 per cent LTV area; plus the risk element – a lot of lenders are pulling back from high-LTV products,” he says.
However, Mortgage Advice Bureau head of lending Brian Murphy says no lenders have exited the 95 per cent space.
“If anything, with new lenders coming to market the number of lenders offering 95 per cent LTV mortgages is likely to increase,” he says.
John Charcol senior technical director Ray Boulger thinks the figures do not paint an accurate picture.
“They ignore the amount of lending available,” he says.
“If, for example, you have 50 lenders offering 95 per cent LTV and two of these are smaller building societies that exit the market, this translates as a 5 per cent drop in the number of lenders offering 95 per cent LTV. In reality, though, there would be virtually the same amount of lending on offer.”
Meanwhile, the latest figures from the Council of Mortgage Lenders show that the reduction in products has not resulted in a drop in first-time buyer activity. The sector borrowed £13.7bn in Q2 2016 – up 23 per cent on the first quarter of the year and up 21 per cent on the same quarter in 2015. It equated to 87,100 loans in Q2.
The record-low rates on offer during 2016 may explain the increase in first-time buyer borrowing in Q2. The average two-year fixed rate at 95 per cent LTV fell to 4.03 per cent in August 2016, from 4.44 per cent at the same point last year (see data below).
Average rates for two-year and five-year fixes – residential mortgages (Moneyfacts.co.uk)
Help to Buy 2
Back in January 2014 the Government’s remedy for a sluggish high-LTV market was to launch H2B2. Lenders could buy a guarantee from the Government to cover any losses on 80-90 per cent LTV loans, should the borrower default.
There are currently 74 H2B2 products but will the high-LTV market survive when the scheme is terminated at the end of the year?
Moneyfacts spokeswoman Charlotte Nelson thinks the number of products at 95 per cent LTV will dwindle further when the scheme ends.
“This will provide a further blow to borrowers with small deposits who were getting accustomed to the plethora of choice,” she says.
London & Country associate director of communications David Hollingworth thinks the Government will not end H2B2 as planned if the prognosis for the high-LTV sector looks
“I’m sure there will be some work to be done on whether it should be continued or whether the market can stand on its own two feet,” he says.
“In recent years, more lenders have come into that market without relying on the guarantee, including Nationwide and Yorkshire Building Society. Santander, which initially launched a 95 per cent LTV product through the scheme, recently launched a standalone 95 per cent mortgage outside it, which is an encouraging sign.”
Boulger says all lenders currently using H2B2 will continue to offer 95 per cent loans when the scheme ends.
“They will either self-insure or buy private-sector insurance, which the smaller lenders already do,” he says.
“On the basis that Santander has moved away from the guarantee and not changed its rates, I can’t see why any other lender would need to.”
Phillips is also unconcerned about the termination of H2B2. He says: “Lenders will plug the gap with something else. I expect more innovation but many lenders are focusing on lower LTVs, so the volume at the higher end may be smaller.”
Crone, however, is less optimistic. “H2B2 members are offering products outside the scheme but not necessarily conducting higher (or even similar) levels of high-LTV lending,” he says.
“We’re back to risk, and also the higher levels of capital required to complete low-deposit business. Lenders may feel it’s much more profitable and less risky to deal with borrowers who have large deposits or levels of equity.”
If there is no plan for a handover to private mortgage insurance, and no action by the Government to secure a commitment from lenders to keep lending in this space, product and lending levels could continue to drop off, believes Crone.
Not all sectors have relied on H2B2 for support in lending to high-LTV customers, however. Although many building societies have backed Help to Buy 1 – the equity loan scheme – the sector made a group decision not to get involved in HTB2 when it was launched in 2014, according to Building Societies Association mortgage policy adviser Robert Thickett.
Nevertheless, building societies have continued to lend at higher LTVs, with many having had commercial mortgage indemnity guarantees in place for 95 per cent lending before the launch of H2B2.
Thickett hopes the ending of the scheme – assuming it proceeds on schedule – will not cause banks to turn their back on high-LTV lending once more.
“If banks failed to continue providing this type of borrowing, there would be a knock-on impact on the number of borrowers with smaller deposits who would be able to get a mortgage,” he says.
The graph below shows the percentage of loans provided by building societies at above 85 per cent and 90 per cent LTV since 2012.
Percentage of all building society lending at higher LTVs (CML, based on Regulated Mortgage Survey)
In the first two quarters of 2016, the proportion of high-LTV loans from building societies rose to levels last seen in 2013. Whether this trend continues will depend on how the market and the wider economy develop, says Thickett.
“If house prices continue to rise at a similar pace to the past couple of years then, as a result of affordability constraints, there will be a limit to how far lenders can go,” he says. “In the last financial crisis, we saw customers able to stretch further and further rather than address the underlying issue – the supply of new housing.”
The BSA wants Prime Minister Theresa May to make it a priority to increase the supply of new housing and it is calling for even greater investment to build at least 250,000 properties a year.
Murphy thinks any risk to the high-LTV market may be addressed in the forthcoming Autumn Statement, scheduled for 23 November.
“One of the things the lending market will seek direction on is continued government support for this vital element of the UK housing market,” he says.
“With the H2B2 initiative due to finish at the end of 2016, if the Government doesn’t continue to support the scheme it could result, in the short term at least, in disruption to the high-LTV/low-deposit arena.”
Halifax Intermediaries currently offers 95 per cent LTV mortgages through H2B2 and other affordable housing ranges. It lends only up to 90 per cent LTV outside the schemes.
Halifax Intermediaries head Ian Wilson says the lender regularly reviews its products to ensure they continue to meet the changing needs of its customers while remaining competitively priced and designed to provide value for money.
“As an industry of responsible lenders, we continue to think carefully about high-LTV solutions, considering the impact of interest rates, house prices and guarantor backing on homeowners and providers,” he says.
Although the UK’s vote to leave the EU has created some uncertainty in the mortgage market, Boulger believes there may be a silver lining.
“When we leave the EU, my understanding is that we will have more flexibility in terms of interpreting the capital rules,” he says.
“So if the Bank of England and Prudential Regulation Authority decide the current capital adequacy rules for high-LTV business are too strict, which in my view they are, they could choose to relax them.
“Looking at the overall public policy and the state of the UK mortgage market, one could make a good case for relaxing capital controls once we leave the EU.”
Boulger thinks the risk from 95 per cent business today is far smaller than it was in the wake of the financial crash of 2007/08.
“Every high-LTV mortgage today must be on a repayment basis,” he says. “Pre-2008, you could get 100 per cent-plus LTV on an interest-only basis.
“With a 95 per cent LTV mortgage now, over the course of two years, even without any capital appreciation, the borrower will be quite close to 92 per cent LTV. Lenders have an automatic guarantee of a reduction in LTV from the first month, which transforms the risk profile.”
In light of this, Boulger sees no reason why lenders could not increase their maximum LTVs.
“At 97.5 per cent, in two years you would be back below 95 per cent. It’s not a major innovation but would be helpful for first-time buyers.”
If the H2B2 scheme were to end today, the market would lose a third of its 95 per cent LTV deals. Undoubtedly, this would have a negative impact on first-time buyers’ ability to get on the housing ladder.
The 95 per cent LTV market itself would not disappear, with around 150 products still available, a similar number to that at the start of 2014.
It is hoped lenders are working on alternatives to the government guarantee in order to keep the market alive. The H2B2 scheme has resuscitated the high-LTV sector and nobody wants the first-time buyer market to suffer withdrawal symptoms when it is taken away.
However, without a clear indication from lenders or the Government about their intentions when the scheme closes, the long-term health of the high-LTV sector will be uncertain.