Return of the high LTV mortgage drought?

Despite more products being offered at record low prices, Genworth’s analysis of government and industry data suggests this part of the mortgage market is rapidly falling back into decline.

It reveals that – with total 95% LTV lending down by £147m year-on-year in Q1 2015 – average lending per product has dropped by 38% over the same period. This has contributed to a 10% fall in first time buyer numbers which means that 10,400 fewer people have succeeded in buying their first home so far in 2015 than was the case last year.

New products come with extra price premium – despite rates hitting record lows

The Tracker shows the number of products available to house buyers with a 5% deposit hit a post-recession high of 195 in March 2015, before dropping back to 180 in May 2015.

This is still 36 more than were available to 95% LTV borrowers in May 2014 (144) and 126 more than were available in May 2013 (54) before the Help to Buy mortgage guarantee (HTB2) launched.

Rising 95% LTV product numbers have been accompanied by falling rates, which reached a post-recession low of 4.57% in May 2015 as lenders fought hard for business. This average price for a 95% LTV loan was down by 63 basis points (bps) from 5.20% in May 2014.

However, this price cut was bettered at 75% LTV (down 66bps) and 90% LTV (down 97bps), leaving borrowers having to pay a growing premium to get a loan with a 5% deposit.

95% LTV lending per product down 38% year-on-year

Genworth’s analysis also reveals that the wider product range is failing to result in greater access to high LTV loans. Lending between 90% and 95% LTV in Q1 2015 was down 26% on the previous quarter and down 10% year-on-year as the Mortgage Market Review (MMR) and Financial Policy Committee (FPC) controls weighed down on the market.

Per product, the decline was even greater with average lending of £7.0m in Q1 2015, down by 40% from £11.6m in Q4 2014 and down by 38% from £11.2m in Q1 2014. In fact, the average £7m lending per 95% LTV product in Q1 2015 was the lowest figure recorded in any quarter over the last two years.

High LTV lending per product

As a result of the squeeze on mortgage finance, total first time buyer loans in the first four months of 2015 were down by 10% (10,400) to 83,800 compared to 93,400 a year earlier. The average LTV also dropped from 83% to 82%: leaving the average first time buyer to put up an 18% deposit rather than benefit from greater availability of products needing a 5% stake.

Simon Crone, Genworth Vice President – Mortgage Insurance Europe, comments: “Saving more than a 5% deposit is not achievable for many people, so falling rates and a rise in the number of 95% LTV products – from building societies in particular – should be signs of better things to come for first-time buyers. But these trends do not present the full picture in a climate where regulatory pressures are weighing heavily on lenders and limiting their capacity to offer traditional first time buyer loans.

It seems new products and price cuts are helping lenders to compete over a smaller pool of borrowers rather than driving a genuine recovery in the high LTV market. If this is the reality of life under the new regulatory framework, then we must be grateful for the Help to Buy mortgage guarantee – the downward trend could be far worse without this stimulus in place.

Greater product choice is of limited benefit if the majority of first time buyers are still left out in the cold. The only way to make more loans available without risking the stability of the financial system is through a permanent system of private mortgage insurance and capital relief for lenders. The Help to Buy experiment has taken us part way there, but efforts must now focus on a permanent extension to the scheme that does more than keeping first time buyers out of the depths of despair.”