Housing costs continue to favour FTBs over renters

"There is a large and rapidly growing gulf in the cost of housing that favours first time buyers over renters – providing they can get a foot on the ladder"

Record low interest rates in Q1 2016 mean it hasn’t been this cheap to service the interest on a 95% loan to value (LTV) mortgage since lending at this level was reinvigorated in 2013 following the financial crisis and recession. 95% LTV mortgages are commonly used by first time buyers who are unable to save a substantial deposit, enabling them to step onto the property ladder. The savings of more than £1,300 in interest payments over two years when compared to Q1 2015 will come as welcome news for a group who have been caught by rising house prices and expensive rents.

As the interest costs of paying off a mortgage have fallen, this means the amount spent by high LTV borrowers – those with a 5% deposit – on capital repayments has increased.

The amount first time buyers spend on capital repayments that help them build the equity in their home has risen 18% year-on-year from £5,407 in Q1 2015 to £6,391 in Q1 2016. This means first time buyers can pay off the capital of their mortgage faster, reducing the total amount of interest paid over the lifetime of their mortgage.

Two year interest repayments for a 95% LTV mortgage

Cost of buying falls while renting costs rise, leading to largest gap since the financial crisis

While the costs of servicing the interest on a high LTV mortgage have decreased sharply, the cost of renting has risen in a further blow to hopeful buyers who will find it hard to save for a deposit while covering the cost of rent. Over the last year, the cost of a year’s rent has increased by £300 (or 3%) from an average of £9,188 in Q1 2015 to £9,488 in Q1 2016.

When you compare the cost of renting to the interest cost of a mortgage, which is the part of the mortgage payment that does not go towards the owner building up their equity share in the property, akin to a form of saving, renting is £4,415, or 87%, more expensive.

The current difference is £111 more than the £4,305 extra it cost to rent compared to paying mortgage interest in Q4 2015, and £1,900 more than in Q3 2014 when the gap was at its smallest (£2,515).

The total cost of servicing a 95% LTV mortgage (interest and capital repayments) is also cheaper than it has been at any point since the Help to Buy mortgage guarantee (‘HTB2’) was introduced at the end of 2013. The total cost of servicing a mortgage over two years is more than £300 cheaper (£323) than it would have been a year ago, and £217 less than in Q4 2015.

Even when you include the full mortgage payment (interest and capital repayment) the cost of paying a mortgage is still £1,282 cheaper than renting (£8,206 vs £9,488) as a result of low mortgage rates and rising rental costs.

Help to Buy 2 lowered mortgage costs and revived high LTV market

The average interest rate of high LTV mortgages has been steadily decreasing since the introduction of HTB2 at the end of 2013, which also provided a much needed injection of activity to this part of the mortgage market.

In Q1 2016, the average rate fell to a record low of 3.93%, down by 0.20 bps from the previous quarter (4.13%) and down 0.78 bps year-on-year. The revival of lending to borrowers with small deposits has been vital to widening access to the lower cost of housing for homeowners.

Simon Crone, Commercial Director, AmTrust International, Mortgage and Special Risks commented: “There is a large and rapidly growing gulf in the cost of housing that favours first time buyers over renters – providing they can get a foot on the ladder. Record low interest rates mean that those lucky enough to buy their own property are benefitting from lower payments, while rental costs continue to rise, penalising those unable to save enough for a deposit. Such is the gap that homebuyers with 95% loans are able to make savings of more than £4,400 a year and reap the added benefit of paying off the capital of their mortgage.

However, many first time buyers are unable to save deposit sums – largely as a result of high rental costs – and are therefore reliant on being able to access high LTV mortgages. It is therefore vital that we have a strong, sustainable supply of high loan to value lending to support those with smaller deposits who want to buy a home.

Government intervention in the form of the Help to Buy mortgage guarantee scheme fired the starting gun on the return of high LTV lending after it collapsed during the financial crisis. The competition between lenders we have seen since the scheme was introduced has pushed down rates on 95% LTV mortgages, helping to improve access to homeownership for first time buyers. However, the Help to Buy scheme will close at the end of the year and it is concerning to see signs that high LTV lending is on the wane.**

Following the vote to leave the EU, high LTV lending faces an added threat. Lenders are likely to become more risk averse as a result and could drastically cut back on their high LTV mortgage offering. This would have harsh implications for hopeful first time buyers who are likely to also face greater job insecurity, at least in the short term. Wider use of mortgage insurance supported by the private sector could therefore help to maintain high LTV lending and support home ownership in an otherwise volatile climate, while still promoting stringent standards and reducing the risk to the lender.”