Lending from 90% to 95% LTV is still 80% lower than it was seven years ago, despite rising to £1.46bn in Q1 2014. Genworth’s analysis indicates that this included £827m-£873m of HTB2 lending, without which the Q1 2014 total would have amounted to just £585m-£631m.
It means the government scheme is saving this part of the mortgage market from slipping back into decline. With the value of HTB2 loans removed, the best case scenario (£631m) would have been the lowest quarterly total for a year (since Q1 2013) and lower than any quarter during 2012.
The worst case scenario (£585m) would have amounted to less activity than during the recession, when the quarterly average was £587m from 2009 to 2012.
Simon Crone, Vice-President – Mortgage Insurance Europe at Genworth, commented:
"It is clear the 95% LTV market would still be significantly depressed without Help to Buy 2. Loans with a 5% deposit were first time buyers' staple diet from the 1980s to the early 2000s. But even with Help to Buy 2 in place, there is still a yawning gap to close before we reach a stable middle ground between the previous lending peak and the drought that followed during the recession.
“Downsizing Help to Buy runs the risk of throwing the recovery into reverse and its winding down in 2016 may negatively impact activity. An exit strategy is needed well in advance to avoid this scenario and improve the long-term prospects of first time buyers. The OECD recently judged that shifting Canada's own state-run scheme to the private sector would strengthen the country’s financial stability. A similar long-term solution could undoubtedly benefit the UK and remove the reliance on taxpayer funds."
Regional analysis shows guaranteed mortgages – via HTB2 and private insurance – are supporting property purchases well below the market average price. This is most visible in London, the South East and East Anglia, where prices have risen most in the last year: undermining suggestions that Help to Buy 2 has driven this growth.
Recent fears over rising loan to income ratios have prompted the government and the Bank of England to consider strengthening the Bank’s powers to intervene in the mortgage market, with Governor Mark Carney warning against loans at 4.5x or 5x borrowers’ income.² But data for new lending using Genworth’s guarantee shows almost two thirds of loans have an LTI of 3x or less, with no loans made above 4x borrowers’ gross income.
HTB2 lenders have also had to be compliant with the new mortgage rules since the government scheme began in October 2013, meaning loans will have been subject to stringent affordability checks and stress tests at higher interest rates.
Simon Crone continues:
“Use of mortgage guarantees can make it more practical for lenders to be active in the high LTV market and provides an effective way of incentivising banks and building societies to apply strong and prudent underwriting policies – keeping the focus on affordability and improving the resilience of the overall financial system.
“It allows consultations on lending decisions without taking away lenders’ authority to set their own criteria and make the final judgement. Private insurers are in fact more proactive than Help to Buy in encouraging discipline in a sensitive and targeted way, as they provide lenders with specifically tailored criteria on any insured loan.
“Continuing use of mortgage insurance could support greater first time buyer lending without a long term need for state support. A transition for Help to Buy to the private sector could not only improve on the limited cover and flexibility of the government guarantee, but also use private capital to remove any reliance on government funding.”
