Despite the apparent trend for high-LTV mortgages, lending to borrowers with small deposits remains subdued. Will lenders follow Barclays’ lead with 100 per cent LTVs, or exercise caution on overall affordability?
High loan-to-value mortgages are back in vogue. There are more of them, they are cheaper and a major lender has even returned to 100 per cent LTV lending… sort of.
While this portion of the market may seem on the up, critics point out that, as a percentage of overall loans, lending above 90 per cent LTV has in fact fallen, while the impending scheduled closure of the Help to Buy guarantee scheme could yet mean even fewer clients get their hands on these home loans in future.
Back to the present and Barclays stole the headlines earlier this month when it relaunched its Family Springboard mortgage, through which it will lend the entire value of a property but only where the borrower has a guarantor who can put down 10 per cent in a linked savings account.
While that deal has been hailed in some quarters as innovative, it is only one part of the high-LTV story.
As with rates at lower LTVs, costs for clients with little equity or a small deposit have been falling for years, albeit some credit the launch of Help to Buy in 2013 as a key stimulus for this sector because it led to a growth in product availability.
Broker London & Country says rates are at their lowest since the credit crunch, and possibly at their lowest ever. In recent memory, only some in 2003 came close to today’s levels, it says.
Figures from data analyst Moneyfacts show rates at 90 per cent LTV are at their lowest since it began collecting data on them in 2008, with the current average two-year fixed rate being 3 per cent. This compares to an average of 4.26 per cent two years ago and 6.48 per cent in 2010.
It is a similar story at 95 per cent LTV, where the average two-year fix is 4.11 per cent.
When it comes to best buys for cheap high-LTV deals, L&C points to a two-year fix from Nottingham Building Society at 95 per cent LTV as a stand-out example: at the time of writing, the rate stands at 3.29 per cent with a £999 fee.
L&C adds that, just a year ago, the lowest comparable deal came from Chelsea BS at 3.99 per cent with a £1,675 fee, while two years ago it was an HSBC deal at 4.79 per cent with a £99 fee. The vast difference in rate in just two years shows the extent of change in high-LTV mortgages.
INCREASE IN PRODUCTS
One of the reasons for the continuing rate cuts is the rise in the number of mortgage products available at high LTVs, which has increased competition between lenders. The number of products on offer to borrowers with a 5 per cent deposit jumped sharply from 195 in March 2015 to 267 in March 2016, according to joint research by Moneyfacts and mortgage insurance firm Genworth.
Nationwide senior manager for mortgage products Paul Archer says: “With 95 per cent LTV lending, product availability has increased since the introduction of the Help to Buy mortgage guarantee scheme in October 2013. This has encouraged competition in the market and rates have fallen to levels below most lenders’ SVRs. Although this is in line with the wider high-LTV trend, 95 per cent LTV rates are generally 150 basis points higher than 90 per cent LTV rates.
“The current rate environment is historically low at all LTVs, with rates continuing to fall in 2016 to date. This has enabled borrowers to benefit from lower monthly payments, no matter the amount of equity they hold in their property or the size of their deposit.”
London & Country associate director of communications David Hollingworth adds: “This is great news for borrowers and there could be more lenders that look to improve their rates, given that the battle for lower-LTV business is so fierce.
“That will continue because higher-LTV business has presented an opportunity for lenders to price more competitively but the benchmark rates have been more stable.”
Naturally, first-time buyers benefit most from attractive high-LTV rates – as long as they can meet what may be stringent criteria. However, these products may also help people seeking to remortgage, particularly those who bought their home quite recently with only a small deposit and have not yet paid off much of their debt. That said, Cherry Mortgage & Finance broker Matthew Fleming-Duffy notes there are fewer options at 95 per cent LTV for those remortgaging.
Of course, although rates are getting lower on high-LTV mortgages, the smaller the borrower’s deposit or equity stake, the pricier the deal.
“There remains a premium on 95 per cent LTV deals compared with the options for those who can stretch to a larger deposit,” says Hollingworth.
“As a result, it can make sense for some borrowers who are nearing a lower banding to keep saving hard.
“However, with house prices still rising in many areas, it can be a question of whether they can save quickly enough to keep pace.”
As Hollingworth suggests, attractive rates do not necessarily make it easier for borrowers to buy a home, given the surge in house prices.
Latest figures from the Nationwide house price index show that the average UK property price rose by 4.9 per cent in the year to April, with the average house price now £202,436.
Santander Mortgages head of business development Graham Sellar says: “Affordability and deposit remain the two key factors that will enable or disable people getting on the property ladder, and affordability still remains a big hurdle in the residential space.
“With average incomes in the UK at around £25,000 a year and average properties costing around £200,000, this will always be a challenge.”
In fact the data shows that, despite rates getting cheaper and availability increasing, there has been no surge in high-LTV borrowers being granted a mortgage. According to Bank of England figures, the number of new mortgages at 90 per cent LTV or above as a percentage of overall lending has fallen steadily during the past few months, so this portion of the market has failed to keep pace with the rest. Such mortgages comprised 3.74 per cent of all loans in the final quarter of 2014 but this figure dropped to 3.18 per cent in Q4 2015.
Genworth suggests lenders are more focused on customers with larger deposits. Its director of mortgage insurance Europe, Patrick Bamford, says: “Recent months have witnessed a wave of new high-LTV products in the market, contributing to improved rates and reducing the cost to those, often first-time, buyers who are unable to save large deposits.
“But this should not distract from the fact that lending to those with small deposits remains subdued, putting the dream of homeownership out of reach for those with only modest savings.
“A lack of 95 per cent LTV lending adds to the many challenges hopeful first-time buyers face: poor housing supply, rising house prices, larger deposit requirements and stagnating wages.”
HELP TO BUY GUARANTEE
Many experts worry that the situation could worsen with the ending of the Help to Buy guarantee scheme by the close of this year. They are urging the Government to fill the void.
The scheme was put in place to aid borrowers with smaller deposits by encouraging lenders to offer more mortgages to this group. The Government guarantees up to 15 per cent of mortgage debt on properties worth up to £600,000.
The aim was to give banks and building societies the confidence to lend to these clients by alleviating their fear that, were the borrower to default, they would lose money if they failed to obtain sufficient value for the property to match the mortgage debt.
Bamford says: “Government intervention in the form of the Help to Buy mortgage guarantee has encouraged high-LTV lending and proved that mortgage insurance is an effective tool for supporting first-time buyers.
“However, with Help to Buy 2 finishing at the end of 2016, more needs to be done to ensure that this critical segment of the market has a sustainable future.
“Wider use of mortgage insurance supported by the private sector would help maintain high-LTV lending and support homeownership, while also promoting sensible standards.”
Another threat to high-LTV availability and rates is the greater capital requirement from lenders offering mortgages to those with small deposits. According to the Intermediary Mortgage Lenders Association, this could result from proposed revisions by the Basel Committee on Banking Supervision to its standardised approach for credit risk.
The Basel framework ensures that banks, building societies and other deposit takers have sufficient capital for the underlying risks they bear, such as loans and mortgages.
Imla warns that the most serious impacts of any revisions could be on lending to first-time buyers with small deposits, and to housing associations. It disagrees strongly with proposals that it claims “could distort mortgage pricing and push up the cost of higher-LTV mortgages, which are relied on by many first-time buyers to become homeowners”.
It argues that, by preventing lenders from taking into account borrowers’ financial strength, the Basel proposals could also see loans to many housing associations redefined and subject to much higher capital requirements.
Imla executive director Peter Williams says: “It is vital to have the right checks so that lenders can provide mortgages where there is a legitimate need while maintaining a stable housing market. The Basel consultation sets out with the important aim of ensuring that capital requirements are appropriate to the underlying risk, but we are concerned that the current proposals will not meet this goal.
“Government and industry need to work together to bring greater balance to the housing market. This includes ironing out the technical details of the Basel proposals to defend consumer interests across all housing tenures.”
For now, recent developments may help borrowers with a small deposit or none to reach the first rung of the housing ladder.
For example, under Barclays’ revamped Family Springboard mortgage, with a three-year fix at 2.99 per cent, no deposit is required but clients will be granted a loan only if a guarantor puts down 10 per cent of the purchase price in a special Barclays savings account. The interest rate on the savings account, while not market-leading, is nevertheless healthy at base rate plus 1.5 per cent, making a current rate of 2 per cent.
Initially launched in 2013, the Family Springboard mortgage is not a new concept. However, until this month it required a 5 per cent deposit from borrowers.
Barclays’ research found that 35 per cent of prospective first-time buyers were forced to ask their parents for help in securing a mortgage. Although the revamped deal does not change that premise, the relative or guardian in question does not have to hand over their cash completely because it is returned after three years.
In other, joint research by Legal & General and the Centre for Economics and Business Research, the so-called Bank of Mum and Dad was found to have lent so far in 2016 a total in excess of £5bn – providing deposits for more than 300,000 mortgages to purchase homes worth a total of £77bn.
The research concluded that the Bank of Mum and Dad was equivalent to a top 10 UK mortgage lender and predicted it would be involved in a quarter of all property transactions this year.
Barclays’ relaunched Family Springboard mortgage is far from the first of its type. Lloyds previously ran its Lend a Hand deal, whereby first-time buyers with at least a 5 per cent deposit could obtain a mortgage if a friend or family member put up cash in a linked savings account. The stipulation was that the deposit and savings combined had to add up to at least 25 per cent of the property price.
As many brokers are aware, high-LTV mortgage rates are not alone in having fallen over recent years. According to Moneyfacts data, in April 2014 the average two-year fix at 60 per cent LTV stood at 2.88 per cent, but by August 2015 had fallen to 1.85 per cent.
Although the average rate has since crept up – reaching 1.98 per cent in April this year – it is still attractive compared to historical norms.
Interestingly, average tracker rates have also risen recently. Moneyfacts data shows the average two-year tracker stood at 1.98 per cent in November 2015 but had crept up to 2.04 per cent by the start of this month.
The general outlook for rates across all LTVs may be influenced by the approach of the EU referendum. Chancellor George Osborne has already stated that mortgage rates could rise if the UK votes to leave the EU. Of course, he is a key voice within the Remain campaign so his prediction has been lambasted as scaremongering by his political opponents.
Nevertheless, the mortgage market has been forced to sit up and take note of Osborne’s statement. The theory behind his prediction is that an exit from the EU could cause instability in financial markets, which in turn could lead to a rise in interest rates.
Osborne said last month: “Because of financial stress and the financial stability consequences, you would have a tightening of credit conditions in the market, which would also have an impact on mortgage rates.”
Some mortgage experts agree with Osborne’s forecast of uncertainty. Writing for Mortgage Strategy last month in his regular Market Watch column, Coreco director Andrew Montlake said: “There would undoubtedly be some initial chaos and disorder associated with a Brexit vote.
“One possible outcome of an exit vote would be a panic among investors, leading to an immediate weakening in sterling that ultimately would force interest rate rises.
“However, there are also those who suggest it would trigger an immediate cut in rates and the resumption of quantitative easing.”
A nearly unanimous view among economists is that little is likely to happen to interest rates until the outcome of the EU referendum is known.
Santander UK chief economist Barry Naisbitt says: “The news from recent UK economic activity indicators remains mixed: quarterly GDP growth in the final quarter of last year was marked up to 0.6 per cent and was stronger than in the third quarter, but the latest activity indicators clearly show a slower start to this year.
“Inflation did pick up to 0.5 per cent in March but it remains well below the 2 per cent target. With the US Federal Reserve pulling back its policy rate expectations and the European Central Bank acting to stimulate the eurozone economy, the Monetary Policy Committee members are likely to want to see more evidence on how inflation and growth are developing before considering taking any policy action.”
Rates are unlikely to be influenced by political and economic factors alone; competition between lenders is also bound to have an effect.
“The outlook for rates is likely to remain very competitive and lenders will continue to jockey for position,” says Hollingworth.
“That could yet yield more movement and improvement for first-time buyers.”
Comment: Borrowers with limited savings must not be excluded from homeownership
By Matthew Fleming-Duffy, mortgage and finance broker, Cherry Mortgage & Finance
There are more than 30 lenders offering mortgages at 95 per cent LTV and, with rates below 3 per cent, this segment of the market has become far more competitive.
Only a couple of years ago, rates were much higher and borrowing options were fewer; more significantly, I remember most cases failing a credit score at 95 per cent LTV.
Interestingly, I am not aware of any banks offering remortgages at 95 per cent LTV. However, some building societies are picking up the slack, with rates as low as 3.09 per cent variable or 3.29 per cent fixed being available to many consumers wishing to remortgage. It is worth noting, though, that remortgaging at this LTV comes with very restrictive criteria.
Looking ahead, predicting rates is difficult. However, while I expect more product innovation, I do not foresee much change in rates over the next 12-18 months… unless, of course, we vote for a Brexit.
It must be said that those with higher-LTV mortgages are at risk of falling into negative equity if property prices fall in the short term. However, according to figures published by Halifax, house prices have increased at an average annual rate of 2.7 per cent, allowing for retail price inflation, over the past half-century or so.
Although some significant increases have been recorded in the past 10-15 years – we have seen radical price spikes in this time and, indeed, dips following the credit crunch of 2007/08 – it must be noted that property values tend to drift upwards in the longer term.
As long as this longer-term valuation behaviour is re-installed into the national psyche – as a counter to the short-termism promoted by many TV shows and newspaper headlines – 95 per cent mortgages represent an excellent opportunity for brokers to assist many more consumers in purchasing a home.
The Help to Buy mortgage guarantee scheme was an inspired mechanism created by the Chancellor that has been very successful. It will be interesting to see how many of the lenders currently using it will continue to offer 95 per cent mortgages after its withdrawal.
It is appropriate that lenders exercise caution when seeking to provide a mortgage, without much tolerance for short-term dips in property prices, and it is, by definition, riskier lending; but it is essential for the UK housing market that lenders do not exclude from homeownership those with limited savings.
Banks, which should have a heightened sense of social responsibility following the exposure of their malpractice in multiple business areas over the past few years, could make more use of mortgage indemnity guarantees to ensure their continued provision of these loans.
Homeownership is of great social importance in the UK; it gives many people a sense of worth and personal stability. I have lost count of the clients who have whooped with delight when I have helped them to buy their home, particularly when they have had access to only a small amount of savings.
Not everyone can approach the Bank of Mum and Dad for deposit contributions.