The average 95% LTV two year fixed rate rose more than twice as fast as at 75% LTV in the six months to September, widening the price gap from 2.69% to a new record of 2.81%. Average 95% LTV rates remained more than double the 75% LTV average (5.27% vs. 2.46%).
Because the higher 95% rates are charged on the full loan, it leaves consumers implicitly paying a far heavier price in interest repayments for their extra borrowing above 75% LTV.
The equivalent rate for this extra borrowing reached a new record of 15.81% in September, rising by almost a full percentage point since March to within two percent of September’s average credit card rate (17.47%).
Comparing 95% to 75% LTV products, September’s price gap (2.81%) and extra borrowing rate (15.81%) were both the highest since records began. In contrast, the average price gap was just 0.25% from 1995-2008 while the extra borrowing rate averaged 6.84%.
In contrast, the price gap from 75% to 90% LTV fell between March and September 2014, reducing the extra rate for 90% LTV loans from 14.43% to 13.08%. But this still remained significantly higher than the cost of an unsecured personal loan, which averaged 9.26% for £5,000 loans and 4.97% for £10,000 loans during September.
Simon Crone, Genworth Vice President - Mortgage Insurance Europe, comments:
“Simply needing a high LTV mortgage is no real indication of someone’s credit quality, but these findings show homebuyers with a 5% deposit are being made to pay a rising premium that rivals the costs of unsecured borrowing.
“The option for lenders to get capital relief through government or private insurance partnerships is supporting some of the more competitive rates on the market without sacrificing underwriting standards or compromising on financial stability.
“High LTV borrowers will be left counting the cost of capital pressures on lenders until the use of insurance partnerships becomes more common across the market to satisfy regulatory requirements without burdening consumers in the process.”
Lenders have focused on the 85% and 90% LTV bands in the last six months, with these being the only categories to see product numbers grow since March alongside the implementation of the Mortgage Market Review.
However, the 95% LTV product range saw the most year-on-year growth with almost 100 extra products available in September 2014 compared with September 2013.
With 61 products at 95% LTV available through the Help to Buy mortgage guarantee, the scheme provided 43% of the options in this part of the market in September: highlighting its importance in supporting buyers with 5% deposits.
Its impact over the last year meant 95% LTV products grew to account for 4% of all residential mortgage products in September: a share that is four times greater than 12 months earlier (1%).
The 90% LTV band also increased its share of the product range in the last year from 10% to 12%. In contrast, products up to 75% LTV fell from 51% to 46% of the total.
Simon Crone comments:
“It has taken state intervention to spark renewed competition between lenders in the new regulatory environment. But with the government still grappling with austerity measures, it makes no sense to commit taxpayer funds to do a job that the private insurance sector is more than capable of continuing in partnership with the Treasury and regulators.
“Aspiring homebuyers would suffer a huge blow without the options currently available through Help to Buy. There is a long term need to support high LTV mortgage lending but there are far better solutions than creating a long term burden on the state to do so.”
The average LTV among first time buyers has responded to the greater availability of loans at 85% and above during 2014. Six of the eight months from January to August saw an average first time buyer LTV of 83% or 84%. Compared with a pre-Help to Buy average of 80%, this indicates more borrowers securing a mortgage on their first home with a smaller and more affordable deposit.
Simon Crone comments:
“The Bank of England has ruled that the Help to Buy mortgage guarantee is supporting responsible lending with no material risk to financial stability or effect on house price growth.4 The return of high LTV borrowing options must now be prolonged to have any hope of maintaining homeownership as a realistic goal for the younger generation.”
