Please mind the gap: FTBs warned over interest rate differences between low and high LTV mortgages

Warren Lewis
14th November 2016
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"The end of the Help to Buy Mortgage Guarantee Scheme and the EU referendum result should not mean the end of healthy levels of high LTV lending"

New data from AmTrust International has shown that, since the EU referendum, the average interest rate gap between 75% and 95% LTV mortgages hit a year-long high in September.

Cost of borrowing falls but at a slower pace for high LTV borrowers

Following the Bank of England’s decision to lower the Bank Base Rate to 0.25% in August, mortgage rates fell across the board. However, the average cost of a high LTV loan is falling at a much slower pace; the 0.05% decline for a 95% LTV mortgage in the last three months is a meagre third of the 0.15% rate drop for 75% LTV mortgages.

This has led to the opening of a 2.24% gap in the interest rates available between the high and low (95/75%) class of LTV borrowers in September. This is the widest the gap has been for almost a year (November 2015) as first-time buyers suffer most after the referendum vote to leave the EU.

First-time buyers can save almost £400 compared to a year ago

As a result of low interest rates, the cost of borrowing continues to fall. While still heavily favourable to the lower LTV market, this is a welcome development for all borrowers.

The average monthly payment for a 95% LTV mortgage borrower reduced from £822 to £790 between September 2015 and September 2016 – a 4% reduction, and a saving equal to £384 per annum for first-time buyers.

However, those with bigger deposits make greater savings compared to a year ago. For example, for those with a 90% LTV loan the typical cost of monthly repayments has fallen by £44 a month, equal to £528 a year; another sign of the hurdles facing first-time buyers as they enter the property market.

The number of mortgage products available on the market increases, while first-time buyer product choice stagnates

There were 747 75% LTV products available in October, the highest number since November 2015 (822). This is an increase of 8% from 689 in June – the largest increases here came in the 75-90% LTV bracket, meaning those who can save larger deposits benefitted from the greatest array of mortgage choice in October for almost 12 months.

Between August to October an average of 239 95%LTV mortgages were available, down from an average of 247 in the three months leading up to the referendum - a decline of 3% in consumer choice. A further sign the market is shifting further and further away from the first time buyer.

The graph below illustrates the number of available products entered a year-long period of decline following a peak in October 2015, however the last three months have seen a partial recovery.

Simon Crone, Commercial Director, AmTrust International, Mortgage and Special Risks commented: “The drop in the price of mortgages is a welcome development for borrowers but the worry is the EU vote has led to a market distortion at the expense of first-time buyers with small deposits. The early signs are that borrowers with small deposits may not be benefiting as much because of less competition as lenders reassess their risk appetite and rely upon those with larger deposits instead.

It would be a great shame if the positive steps taken by the industry and the Government to improve lending to first-time buyers, after a calamitous collapse in the wake of the financial crisis, was undone over the months ahead. The next few months will be a key period as lenders decide on their risk strategies in this sector and the Help-to-Buy Mortgage Guarantee Scheme comes to an end.

The end of the Help to Buy Mortgage Guarantee Scheme and the EU referendum result should not mean the end of healthy levels of high LTV lending. Private mortgage insurance is a powerful tool that lenders can use to support lending at high LTVs while protecting the taxpayer by minimising systemic risk and keeping lending standards high.”

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