"Ask a borrower – particularly a first-time buyer, what might they believe to be a small deposit? I would suggest it might far less than 14.9% of the price of the property"
You might think there is a broad consensus about what constitutes high LTV/small deposit lending but again this is dependent on lenders’ appetite for risk and their own lending policies. From a more general perspective though, ask a borrower – particularly a first-time buyer, what might they believe to be a small deposit? I would suggest it might far less than 14.9% of the price of the property, which is the definition of ‘small deposit’ in recent data released by e.surv; indeed I suspect you would say 5-10% maximum.
In this research however a small deposit is defined as anything less than 85.1% LTV and it suggests that in June this year, just 18.5% of all loans went to those borrowers in this category. This is down from 21.3% in May and the 21.5% recorded in April. Compare this to ‘large deposit borrowers’ – defined as those who have a deposit/equity of 60% or more – who accounted for 34.5% of the total mortgage market in June.
Again, it may be unsurprising to learn that as the number of loans taken out by small deposit borrowers is falling, the numbers going to large deposits is increasing. We’ll not be telling you anything you don’t already know here because this is a trend which has been going on for some time, and has undoubtedly been exacerbated by the closure of the Help to Buy 2 Scheme and the failure by some lenders not to offer high LTV loans (90%-plus) outside the scheme as they did within it.
But, lets also return to that definition of ‘small deposit’ because, as mentioned, 14.9% deposit seems a large amount. We might prefer to look at the level of loans taken out by those in the 5/10% bracket, and while e.surv doesn’t supply this specific breakdown, I would hazard a guess that this has been moving in the same direction, namely down, and probably at a faster pace than for example 85% LTV.
What e.surv does have however is a regional interpretation of how you might fare as a small-deposit borrower across the country? For instance, Yorkshire would appear to be the place to be if you’re a small deposit first-time buyer because they ‘...are proportionally more likely to have a mortgage application approved in Yorkshire than anywhere else in the UK’. Here we had 28.1% of all loans in the region going to small deposit borrowers during June – almost 10% more than the UK average – and in areas such as the North West (26.3%) and Northern Ireland (25.7%) borrowers here are also faring rather better. Unsurprisingly perhaps, it is London where small deposit borrowers fare worst with just 14.3% of loans going to these individuals.
It does, once again, underline the very different property and mortgage markets that are at play within the whole of the UK. And again, how stark might the difference be if we were defining small deposit borrowers as those with 10% or less? From our own research, we’ve seen the lack of products available to those first-timers with just a 5% deposit and looking for an averagely-priced house in the region of £160k. In our LTV Tracker we found that product numbers tend to be between one and five – in a market which is often trumpeting the increase in products available, then this is a very small pool to choose from.
Small can be beautiful but increasingly so – because of numerous factors – lenders are seeking larger-deposit loans in the belief that it insures them against the perceived greater risk that comes from those who have only been able to put 5/10% deposits down. But, there is a danger in this - if the market continues to put up the mortgage barricades for first-timers who, for example, don’t have the Bank of Mum and Dad to support them or don’t want to wait 20 years while they save up for a deposit whilst paying their monthly rent, then where does the new blood come from?
As the Help to Buy 2 scheme showed, albeit with a State guarantee, there is an appetite for these loans and by utilising private mortgage insurance this demand can be covered whilst the lender also covers the greater risk. It would be an immensely powerful message to send to first-time buyers with ‘truly’ small deposits that they can get on the ladder and that lenders are willing to help them get there, but it is likely to need a change in attitude and greater utilisation of private mortgage insurance in order to get there.
