A lack of higher loan-to-value finance has limited access to home ownership. Our new analysis looks at the new 95% mortgage guarantee scheme in more detail and examines the level to which it will impact the size of the housing market and house prices.
The 2021 Budget announcement boosted the housing market, through a stamp duty extension and a Government guarantee for mortgages up to 95% of a property’s value (up to £600k).
This is a renewal of a scheme that ran from 2013 to 2016 to help people remortgage after the global financial crisis. It is a scheme for all homeowners, not just first time buyers who will be the main group that use the scheme.
Decline in higher loan to value mortgages in 2020 H2
High loan to value (LTV) mortgages (>90% LTV) have been thin on the ground for many years. They accounted for just 7% of all new mortgages in 2019, and fell back to just 3% in Q3 2020, as lenders pulled out of high loan-to-value lending.
Banks have had little incentive to offer these loans, as the risks of losses are higher and they also have to set aside a large amount of capital for each loan.
The new Government backed guarantee removes most, but not all, of the risk of losses from falling property values and will support more lenders offering loans up to 95% of the value of a home.
Greater availability of higher loan-to-value mortgages supports home ownership, but it is not a mass market solution. The mechanics of mortgage regulation and affordability mean it will be easier to get a 95% mortgage in some areas of the country than others.
95% LTV mortgages are great for buyers in lower value housing markets
Unfortunately, high LTV mortgages do not work so well in southern England where prices are high. A £500,000 home in London would mean a mortgage of £475,000, which would require a household income of at least £105,000 for most lenders to consider it.
These products work better in lower value markets where a 95% loan is more manageable and the repayments on the mortgage are not that different to the cost of renting.
The map below shows the gap between mortgage repayments when buying with a 95% loan, and the rental costs for a 2/3 bed home, assuming a 5% mortgage rate.
Areas in lighter purple are where 95% LTV mortgages work better for borrowers. In areas shaded darker purple, buyers will need a larger deposit, or to buy a smaller, cheaper home.
95% mortgage scheme impact on the market and prices
So, 95% LTV mortgages are welcome news for many buyers, but not all. As you can see, the policy works well for the Government’s “levelling up” agenda, boosting home ownership in regional housing markets.
There is also the question of the appetite for first-time buyers to take on high levels of debt. For some it is not an option, but with many buyers taking on mortgages with over-30-year terms, a deposit of 10% seems a more desirable starting point for those that can afford it.
We believe this is an important but small-volume scheme, meaning any impact on pricing and levels of overall market activity is likely to be modest.
Much depends on how many lenders participate, and the value of money committed against higher loan-to-value products, which will become clearer over 2021.
Renting a viable choice alongside buying
Meanwhile, more and better quality rental supply means people have more choices about whether to rent or buy and more flexibility. Greater consumer choice is important for a healthier housing market.
First-time buyers are buying later in life, in their thirties, and in most cases outside London, aiming for a 3-bed home as their entry point for the market.
In the past they tended to buy earlier, buy much smaller and rely on a bigger mortgage in the hope that house price growth would carry them along and further up the housing ladder.
This is not the case now, and while this new scheme will improve choice and options for a cohort of buyers, it is currently a short-term initiative to boost availability of higher loan-to-value mortgages.