First time buyers facing higher prices also have less mortgage choice, says new report

The average cost of a first time buyer home in the UK reached £161,912 in June which means that the need for high loan to value lending is increasing, according to a new report.

However, the number of high loan to value (LTV) mortgage products has fallen for the two consecutive months since the UK voted to leave the European Union, the latest AmTrust Moneyfacts LTV tracker report shows.

In August, the number of available mortgages for those with 5% deposits fell from 243 in July to 238 and it was the second month in a row to see the number of 95% LTV mortgages decrease from 249 in June to 243 in July after the UK voted for Brexit.

In comparison, the number of available products for those with larger deposits rose month on month suggesting it is only those unable to save bigger sums of money that are feeling the effects of Brexit so far. The number of mortgages for those with 20% deposits rose by the most month on month from 597 in July to 607 in August.

Overall 95% LTV mortgage lending accounted for just 2.5% of total mortgage lending in the first quarter of 2016, down from 3% the previous quarter and down from 3.5% year on year, illustrating a declining trend in lending to those with small deposits.

This is a fall from a peak of 4.2% in the second quarter of 2014, when the Help to Buy Mortgage Guarantee was first introduced, to 2.5% in the first quarter of 2016. The report suggest that these findings are a further worrying indication of decline, particularly concerning for first time buyers who are typically unable to save large deposit sums and rely on high LTV lending.

It report also says it suggests that while lenders have appetite for lending in general, they are more focused on lending to those customers with larger deposits. It is clear a long term approach to encourage high LTV lending by lenders is needed, the report adds.

The report claims that the decline in mortgage products at 80% LTV or higher coupled with the fall in lending at 95% LTV will add to fears that home ownership is moving further out of reach. This is supported by recent research by the Resolution Foundation, which found that major English cities, across the country and not just in London and the South East, have seen sharp falls in homeownership since a peak in the early 2000s.

However, there is some positive news for first time buyers able to get on the property ladder as mortgage rates fall to new lows. In the midst of ongoing speculation about the Bank of England lowering the interest base rate from 0.5% to 0.25%, average mortgage rates fell to new lows in July offering substantial savings for first time buyers lucky enough to get on to the property ladder.

The average rate for a 75% LTV mortgage fell to 1.72% in July, down year on year from 1.87%. Over the same period, the average rate for a 95% LTV mortgage fell by three times as much from 4.32% to 3.86%.

There is therefore now a price differential of just 2.14% between 75% and 95% LTV mortgage rates, a record low and down 0.31 bps from a year ago. Although this means first time buyers with small deposits still face larger repayments than those with bigger deposits, the costs facing them now are less than a year ago, the report explains.

For those with a 5% deposit, the lower mortgage interest rates mean they can save £40 a month compared to what they would have paid if they’d taken out an average first time buyer loan a year ago, July 2016 compared to July 2015, This adds up to savings of more than £480 over the course of a year.

Those with 10% deposits fare even better. The monthly payment on a 90% LTV mortgage for an average loan was £52 per month lower in July 2016 compared to 2015, equating to annual savings of £624.

‘The early indications are that Brexit has not prevented the upward march of house prices for first time buyers, making high loan to value critical to those hoping to take their first step onto the house ladder,’ said Simon Crone, commercial director, AmTrust International, Mortgage and Special Risks.

‘In the wake of uncertainty caused by June’s vote for Brexit it is concerning, but perhaps not surprising, to see the number of available products for those with small deposits going into decline at a time when lender appetite for risk looks set to decrease,’ he explained.

‘The availability of loans for those with small deposits received a much needed boost when the Government introduced the Help to Buy mortgage guarantee scheme, yet while mortgage lending is increasing lenders appear increasingly focused on lending to borrowers with greater deposits. This suggests that Brexit may not be as good for first time buyers as initially thought. Despite the lower interest rates available, house prices continue to rise and a lack of appetite for high LTV lending will take its toll on first time buyers,’ he pointed out.

He believes that saving a large deposit remains the biggest obstacle to home ownership, made harder for hopeful buyers by high rental costs and stagnant incomes. ‘High LTV lending is therefore invaluable to many first time buyers and their dreams of home ownership. Along with Brexit, proposed regulatory changes could also add to the diminished lender appetite as a result of higher capital requirements for lenders offering high LTV loans, which would be an extra blow to lending to those with small deposits,’ said Crone.

‘A wane in high LTV lending suggests there was just a temporary restoration after the introduction of the Help to Buy Mortgage Guarantee. This will exacerbate fears that homeownership levels are in long term decline because of the challenges first time buyers face in accessing the market. Failure to support first time buyers will impact the wider housing market by preventing people from moving up the housing ladder,’ he commented.

‘It is clear that a long term solution is needed. Greater encouragement of high LTV lending as well as bespoke options to keep on supporting first time buyers that aren’t able to rely on parents for help with a large deposit. Private mortgage insurance is proven to be an effective tool at encouraging high LTV lending while also protecting the taxpayer, keeping risk down, of particular importance in the post-Brexit world, and maintaining high lending standards,’ he concluded.