Buyers’ high-risk strategy
BRITONS are increasingly stretching themselves to get on the property ladder as the number of high loan-tovalue (LTV) mortgages hits the highest level since the financial crisis.
The share of new mortgages worth more than 90 per cent of property value is back to 2008 levels, according to new figures from the Bank of England, as more people borrow to the max to keep up with spiralling house prices.
Borrowers who take out loans at a high percentage to the property value are at much greater risk if house prices fall and could quickly find themselves in negative equity.
Analysts KPMG are warning that prices could drop by up to 20 per cent in a no-deal Brexit.
In May, Sam Woods, deputy governor of the Bank’s Prudential Regulatory Authority (PRA), warned lenders that the mortgage price war was encouraging them to take on riskier clients, and he was “watching them like a hawk”. There are early signs that lenders are concerned too, and are now starting to cut back on high-LTV offerings before it’s too late.
HIGH ANXIETY
High-LTV mortgage lending soared before the financial crisis, amid the rise of 100 per cent mortgages, where buyers didn’t need a deposit, and is now seeing a resurgence.
Mark Gordon, director of mortgages at Comparethemarket.com, said: “For many, these may be their only route onto the property ladder.”
Simon Checkley, managing director of brokers Private Finance, said higher LTV deals cost relatively more than other deals but remain “incredibly affordable” as mortgage rates fall to fresh lows. “The average rate for a 95 per cent LTV two-year fixed rate product is now just 2.95 per cent, nearly a whole percentage point cheaper than this time last year.”
The danger is that this lures people into debt they cannot repay.
Checkley urged borrowers to take out the lowest LTV affordable, to secure a competitive rate and minimise the amount of interest repaid.
RATE CUTS
Lending over 90 per cent LTV now makes up 5.5 per cent of all new mortgages, but David Hollingworth, associate director at London & Country Mortgages, said that looks sustainable for now.
The lowest two-year fixed rate for those with a 5 per cent deposit is from Newcastle Building Society and charges 2.59 per cent, with a £498 fee. “Those with a 10 per cent deposit could opt for a two-year fixed rate from Coventry Building Society charging 1.75 per cent with a £999 fee,” Hollingworth said.
Darren Cook, finance expert at Moneyfacts, said lenders had cut 95 per cent LTV product numbers and increased rates, but only by a tiny amount.
There are still 380 deals available at 95 per cent LTV, while the average five-year fix at this level has increased by just 0.01 per cent. Cook said lenders may now be increasingly wary of this end of the market. He added: “Many are now focusing their attention on mortgage business at LTV tiers of 90 per cent and below.”