Role of 95% LTV mortgages almost doubles under ‘Help to Buy 2’

  • 95% loan-to-value (LTV) loans made up £3.43 of every £100 of mortgage lending since the Government’s guarantee scheme launched, up from £1.77 in the previous 18 months
  • First time buyer lending grew by almost a third during the first half of ‘Help to Buy 2’
  • However first time buyer and 95% LTV lending activity fell year-on-year in Q2 for a second quarter running – the first time this has happened since 2010/11

Mortgages at 95% loan-to-value (LTV) – the loans traditionally used by many first time buyers – almost doubled their contribution to overall mortgage activity during the first half of the Help to Buy mortgage guarantee scheme (HTB2), according to analysis of Bank of England data by Genworth, the private mortgage insurer.

The first 18 months of the scheme saw 95% LTV loans account for £3.43 of every £100 lent across the entire mortgage market (from January 2014 to June 2015). This was up from £1.77 in the previous 18 months as more options have appeared for homeowners with smaller deposits (5%).

Total mortgage lending across the whole market grew by £48.2 billion during the first 18 months of HTB2, while activity at 90<95% LTV grew by £5.9 billion. It means that as the mortgage market has grown during this period, £12.24 of every extra £100 lent has been via 95% LTV mortgages. This has helped deliver a significant boost to overall lending, without compromising underwriting standards or inflating house prices according to the Financial Policy Committee.*

First time buyer lending bolstered by Help to Buy 2

Genworth’s analysis shows Help to Buy 2 has contributed to a strong recovery in first time buyer activity, with overall lending becoming more focused on this group since the scheme launched. First time buyers account for almost £21 (£20.99) in every £100 lent during the first half of HTB2 compared with £19.33 in the previous 18 months. This compares with just £11.41 per £100 in 2007/8 and highlights how the scheme has played an important role in encouraging first-time buyer lending.

Total first time buyer lending grew by £14.4 billion (29%) during the first 18 months of HTB2. Compare this to the extra £48.2 billion of lending overall and first time buyers have therefore received £29.87 for every extra £100 lent as the mortgage market has continued its recovery.

Since 95% LTV lending also grew by £5.9 billion over the same period, it suggests a significant proportion of the extra £14.4 billion lending to first time buyers has been made via 95% LTV loans. This is an encouraging sign for a group that was hit hard by tightening credit conditions during the recession, exacerbating the challenges of raising a big enough deposit to buy a home.

Concerns linger for long term health of the 95% LTV market

The FPC judged in September that HTB2 had stimulated high LTV lending without inflating house prices, with ‘no evidence of looser underwriting standards’ and ‘without posing a material risk to financial stablity’.* Genworth’s analysis shows that, by contributing £3.43 per £100 of total lending under HTB2, the 90<95% LTV segment is a long way short of the £7.47 per £100 recorded in 2007/8.

However, there are concerning signs that 95% LTV lending stimulated by HTB2 may already be on the wane; both 95% LTV lending and first time buyer lending declined by value year-on-year during Q2 2015 for a second successive quarter.

This is the first time this has happened for two consecutive quarters since the lending drought of Q4 2010 to Q3 2011. It contrasts with the substantial growth achieved when HTB2 was first introduced, and raises doubts about how well activity will fare when HTB2 is withdrawn at the end of 2016, particularly with expectations that historically low interest rates will finally start to rise next year, raising costs for borrowers.

Simon Crone, Vice President for Mortgage Insurance – Europe at Genworth, commented:

“There is no denying that HTB2 has played an important part in revitalising the first time buyer and high LTV mortgage market following a significant lending drought. Some participating lenders are now moving towards launching non-HTB2 products, but it remains to be seen whether this will be enough to sustain the benefits of the scheme once it expires.

“We are potentially facing a situation where the high LTV market could easily fall back into decline with the end of HTB2 now just over a year away. Even if the market remains at its present level or grows without government backing, it stands to do so without the added protection of the mortgage guarantee, which the FPC has judged as being effective in upholding underwriting standards. Neither a drop in lending nor an increase in risk looks like an attractive option for the post-HTB2 era.

“Given the FPC’s endorsement of HTB2, it would contradict the government’s stated ambition of encouraging homeownership if it lets the scheme tail off without a suitable replacement, especially since private insurers are willing to work with the Treasury and regulators to remove the burden from taxpayers. Private mortgage insurance could maintain and increase current lending levels while also protecting the public purse by carrying this mortgage risk.”

* Mark Carney’s letter to George Osborne, 25th September 2015: available here

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