Analysis by Genworth, a mortgage insurer, reveals the number of mortgages available to buyers with a 5% deposit has now increased by 57% year-on-year, having stood at 116 in January 2014 when lending first began through the government’s Help to Buy mortgage guarantee scheme (Help to Buy 2).
It means that there are now more 95% LTV products available for homebuyers than at any other time since the recession. Numbers hit a low of 43 between August and October 2013 before the government scheme first opened for applications.
They received a much needed boost after its launch: increasing to 150 by April 2014 before dropping slightly over the summer months. The recent growth is a sign of lenders’ increasing confidence in offering loans at 95% LTV.
It also indicates less reliance on the government scheme: the number of 95% LTV products offered through Help to Buy 2 actually fell by one from 61 to 60 between October and January¹. However, the scheme still accounted for one in three 95% LTV products on the market.
Simon Crone, Genworth Vice President – Mortgage Insurance Europe, comments:
“For many aspiring first time buyers, raising a deposit of 25% is simply not an option, so the growth of 95% LTV products is a welcome sign. Help to Buy has clearly restored confidence among lenders to start offering these loans after a severe drought during the recession.
“It is encouraging to see more products emerging outside Help to Buy, and a growing number of building societies are using private mortgage insurance to help them compete. Even so, the government scheme still accounts for a third of products and questions remain in the longer term about how competition will fare when Help to Buy ends.
“Our analysis also suggests that capital constraints are continuing to having a negative impact on pricing for consumers. We need an industry-wide solution to address this and ensure that supply does not dry up again once government support ends.”
The Tracker also shows the best buy interest rate for a 95% LTV mortgage dropped to the lowest amount seen since the recession, down from 4.64% in October to 3.79% in January 2015. This mirrored the downwards trend in product rates across the market as the prospect of a base rate rise by the Bank of England has faded.
The average rate for these products also dropped to a new low, down by 0.46% since December 2014 to 4.79% in January 2015 and down by 0.26% year-on-year.
This means that the price gap between 75% LTV and 95% LTV mortgages narrowed to 2.78% in January 2015 – a fall of 0.49% from December and 0.10% year-on-year.
This will be welcome news for aspiring first-time buyers, but despite the narrowing price gap, the typical first time buyer taking out a mortgage with a 5% deposit on a home worth £150,000 still faces monthly repayments that are significantly higher (£339 or 71%) than a borrower taking out a mortgage with a 25% deposit for the same property.
A 95% LTV loan (£142,500) would cost £816 in monthly repayments based on the latest average rate, while a 75% LTV loan (£112,500) would cost just £477 a month. The difference in repayments adds up to £4,068 a year.
The two year fixed term cost for the 95% LTV borrower is more than £8,000 higher (£8,120) than for the 75% LTV borrower. This is a 71% difference and despite saving £30,000 on a deposit, first-time buyers who are considering a high LTV mortgage will need to factor in significantly higher costs as a result of higher interest rates.
Simon Crone, Genworth Vice President – Mortgage Insurance Europe, comments:
“Despite falling rates over the past month, the persistent price gap between high and low LTV mortgages means those first time buyers who are only able to put together a 5% deposit face far higher monthly costs than those who benefit from family support to boost their deposit. The extra costs add up to a colossal sum for younger households and could leave many feeling the pinch and could make or break their house purchase.
“Help to Buy has encouraged greater levels of high LTV activity but for competitive rates to thrive, there needs to be greater appetite to lend at this rate. This will only happen if capital relief is available beyond 2016 through a permanent system of mortgage insurance. Enlisting the private sector to make this a reality would transfer risk from the taxpayer and make the mortgage market fairer and more accessible to first time buyers in the long term.”
