First published by Financial Reporter
95% LTV Mortgages
Next month will signal an interesting period in terms of product pricing and competitiveness, given that April should mark the first 95% LTV mortgages to be released by those lenders who are taking part in the Government guarantee scheme.
A lot of the focus on 95% has been around first-time buyers’ use of the products, and how it might allow them to get on the housing market earlier, but – unless lenders are only offering these new products to first-timers, which I doubt – this will open up a new front for existing homeowners and remortgagers who might want a higher LTV product.
Questions Around Pricing
The big unknown in this however is pricing, and there has already been speculation around what the 95% LTV rates will be, especially when the lenders concerned will have to factor in the fee they pay to Government for the guarantee.
To my mind, this could go one of two ways. The first, and perhaps the more likely, is that the 95% products come in at relatively high rates and there will undoubtedly be a degree of soul-searching – from advisers in particular – about whether it is ‘good advice’ to be recommending products which could be at significantly higher rates than what is available at 90%, for example.
Much will depend on individual circumstances here, and of course the borrowers’ ability to satisfy the affordability and stress testing put in place by lenders, plus it will also be interesting to see just what level of appetite there is to lend at 95% levels. Each lender will have a clear view of the volume and proportion of 95% LTV lending they wish to attract, and this Government intervention won’t dramatically change that capacity issue.
The second – and this is by no means beyond the realms of possibility – is that the 95% LTV products are priced very competitively and that this generates an even greater amount of interest amongst both first-timers and those seeking to remortgage/move home.
This increased demand could well open the doors for other lenders to become active in this space, perhaps not necessarily utilising the Government guarantee, but as building societies tend to do, using private mortgage insurance, or indeed some lenders who choose to self-insure. Such competition could then push costs down, and this ultimately has a knock-on effect at lower LTV levels; so, for instance, we might see a more competitive 90/85/80% sector because pricing pressure cascades.
Advisers will welcome this, because there is an underlying feeling that pricing – particularly above the 80% LTV level – lacks competitiveness. For instance, while at 60% LTV some of the best rates are in the low 1% range, at 75% this jumps closer to 1.5%, while 80% moves up closer to 2%, 85% to 2.5% and 90% is often over 3%. Of course, lenders are going to price higher, the further up the risk curve they go; the big question is whether these differentials are larger than they would be in more ‘normal’ circumstances.
If we follow this trajectory, and we get two-year fixed-rate 95% LTV products being launched which are most competitive at around 3.5%, consumers might readily accept that. Many say that lower rates are highly unlikely, given the pricing will need to incorporate or reflect the cost of the guarantee scheme, which isn’t insignificant. I’ve heard industry assumptions of 4%/4.5%/5% for the most keenly-priced loans –we’ll have to wait and see, but there would still appear scope for some lenders to make a big statement here, which might then result in different thinking in lower LTV bands too.
If the scenario I’ve painted around pricing pressure being brought to bear by a relatively competitive 95% LTV market seems unrealistic, then you may be disregarding the former Help to Buy guarantee scheme which undoubtedly resulted in greater levels of competition at high LTV levels, particularly from those lenders who didn’t take part in the Government scheme, but wanted to respond to the overall demand for the slice of business it generated.
This Government guarantee is pretty much a carbon copy of the Help to Buy one – might we assume that the same pricing scenario will play out? It would certainly be helpful to have a highly competitive range of products to offer borrowers in this space – we await lenders’ pricing and criteria decisions with bated breath.
Rob Clifford is Chief Executive of Stonebridge