An improved product sector for higher LTV borrowers

Patrick Bamford, head of international business development at Qualis Credit Risk, explores what the future path for Bank Rate means for high-LTV mortgage pricing, whether lenders will continue to grow their higher LTV offering in 2024, and what measures for first-time buyers might be announced in next month's Budget.

Related topics:  Blogs,  Mortgages
Patrick Bamford | Qualis Credit Risk
12th February 2024
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"At this point last month, we were yet to see any major movement in pricing but that has clearly happened over the last month. Indeed, 5% deposit mortgages now resemble the pricing we had for 10% last month."

Having spent the best part of a decade watching the Monetary Policy Committee (MPC) not change a historically low Bank Base Rate (BBR), you would think that making the same decision now would illicit the same level of disinterest.

However, we are clearly a long way away from a BBR of 0.5% or 0.25% or 0.1% and when you have gone through a 12-month period when rates rose at almost every MPC meeting, to have a period where they are not changed, tends to mean more.

For a start, by choosing not to move BBR again, we are not just a couple of meetings away from the last rise, but also a meeting closer to a rate cut, even if – somewhat bizarrely - we had two members of the MPC who wanted to increase rates further to 5.5%.

However, the broader ‘story’ is around the Bank’s suggestion inflation could be at its 2% target by the Spring – although it did then say that it wouldn’t stay there long – and if this is the case, then the clamour and pressure to cut BBR will undoubtedly grow.

Swaps have been inching back up recently, however one-year SONIA swaps – as I write – are currently anticipating BBR to have seen at least two quarter-percentage point cuts over the course of the next 12 months, and that tends to feel like a minimum right now, given where we appear to be heading.

So, what does this mean for mortgage product pricing? Well, as advisers will have seen repeatedly in the early months of January, there was a constant flurry of price cuts as the lender domino effect kicked in, and there is some cause for celebration in that, because of what it means for borrower affordability, and what it might engender in terms of ramping up activity.

Certainly, the high LTV product space has seen the benefits of these wider pricing moves in recent weeks, and that is once again reflected in the number of 95% LTV products available and in terms of the pricing of the best buy products.

As you know, each month I review both the above, based off a 5% deposit on the average-priced home in the UK – which, according to the Nationwide, was £257,656 in January. Interestingly this was a month-on-month increase of 0.7%, and even though the annual figure was still down, the -0.2% drop effectively suggests that any big, further falls in prices are unlikely to be materialising.

However, back to 95% LTV product choice – particularly important for first-time buyers, and in my view, a far better product area for the Government to highlight then focusing on a potential provision of 99% LTV, which feels a little gimmicky and may not actually make it to the Budget announcement.

Using that Nationwide house price figure, a 5% deposit would require £12,883 from the borrower(s), and using those figures we have seen a further improvement in 95% LTV product numbers, up from 200 last month to 216 now.

This figure is comprised of 191 fixes and 24 trackers/variables, and it is clearly positive to see lenders continuing to grow their higher LTV offering.

The further, and perhaps more notable point to make, is however with regards to pricing. At this point last month, we were yet to see any major movement in pricing but that has clearly happened over the last month. Indeed, 5% deposit mortgages now resemble the pricing we had for 10% last month.

Last month, the top five-year fix was priced at 5.17%, now we have the Family Building Society with a 4.79% product, and Coventry Building Society not too far behind with 4.88%.

In the two-year fix space, again we’ve seen a fall in pricing. Whereas last month we had a 5.59% product from the Leeds, now we have Skipton with a 5.22% product and Nationwide with a 5.3% one.

The variable and tracker space has changed less it must be said. We have a two-year discount product from the Progressive at 5.25% but this is only available in Northern Ireland, while we also have Vernon’s 5.4% lifetime discount, and the Newbury’s 5.44% three-year discount.

Not as well priced but, if there is a belief that we could see BBR cut and cut quickly and repeatedly throughout 2024 and beyond, then you might think this is a worthwhile option.

Overall, it’s clearly an improved product sector for higher LTV borrowers, and one which lenders appear to be sensing as worth their time, effort and money, particularly given other areas of the market – particularly lower LTV, mainstream residential – are so competitive at present.

What we also await are potentially market-moving measures to be announced in March’s Budget. There has been a lot of noise about further support for first-time buyers – hence the running of that 99% LTV policy up the flagpole recently – and it would be a surprise not to see the Chancellor intervening again.

Plus, while the vast majority of first-time buyers already benefit from not having to pay any stamp duty, clearly in areas of the South East and London, property prices are higher and there is a cost. Might we see stamp duty cut for all first-timers regardless, or as some are hinting at, abolishing stamp duty in its entirety.

That would certainly kick-start both demand and sales activity, and would be a significant game-changer if the Government is feeling in an ultra-bolshy mood in order to try and shift those opinion polls which look, at present, pretty horrific for them. March 6th will therefore be very interesting indeed, for that and many other reasons.

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