“Lowest ever fixed mortgage rate!”
“Mortgages at historic lows!”
The headlines make it clear that there is now more chance of getting a rate that begins in “0.” than ever before. Homeowners rejoice, you can afford the new carpets after all.
The truth, as ever, is a little more complicated than that.
Those rates are on the market, but the only people eligible for them are homeowners with very low Loan-to-Value (LTV) ratios of below 60 per cent. These are not likely to be first-time buyers – they are not even likely to be second time buyers. This forlorn lot, jubilant at having got on the ladder at all, are willing to suck up paying a lot more than 1.37 per cent – the average rate for a 75 per cent mortgage currently, because they are just so grateful to no longer be renting at exorbitant rates.
But this gratitude is in danger of blinding them to the widening gulf between what they are forking out for home ownership, versus their parents’ generation.
According to AmTrust International’s latest survey, those with a 95 per cent LTV (a 5% deposit, in other words) are paying an average interest rate of 4 per cent – 2.63 percentage points more than their better-endowed, (usually older) counterparts.
Homeowners with a 5% deposit pay an average of £790 in monthly repayments, £324 more than the £466 paid each month by those with 75% loan-to-value (LTV) mortgages.
Is this fair?
Well, from the point of view of a mortgage lender, yes. Borrowers with smaller deposits are more risky, regardless of their incomes, prospects or impeccable credit records, simply because if house prices fall, there is a much higher risk of loss to the lender should it have to take possession and sell the property. In lending markets, greater risk means higher interest rates.
So if a borrower has a massive chunk of equity protecting the loan, the loan is less risky and therefore cheaper.
The result of this risk-based pricing in practice, however, is that it makes it even harder for those on lower incomes (younger people) to afford property. The consequence of the mortgage industry continually (and justifiably) favouring the well-endowed is that younger borrowers become increasingly dependent on the benevolence of older relatives.
The Bank of Mum and Dad is now the ninth biggest lender, according to Legal & General, and no doubt will keep rising up the ranks. Parents are now even being tapped for home improvements by those who scrape onto the ladder but have no money left, according to Plentific.
In looking for solutions to inequality in the housing market, the focus has been on increasing the supply of homes in order to make asking prices more affordable.
Could there be merit instead in looking at tighter regulation of mortgage pricing?
At the moment, it seems clear that those at the bottom of the housing ladder who need the most help, those who are planning families and working over time, are subsidising those who have decades of home ownership under their belt, and can probably afford an extra 1 percentage point or so on their rock-bottom repayments.
The team behind the Fair Life Mark has been working on fair pricing in savings, with the ultimate aim of getting rid of the practice of high initial “teaser” rates that later become unfavourable and instead encouraging providers to offer fair, sustainable savings rates that remain consistent.
Is the same approach possible with mortgages? Where we remove the effective subsidy and bring rates closer together again? Perhaps first-time buyers would even become less risky, because they wouldn’t be struggling so much to meet repayments.
The situation is becoming more urgent as the gap between the mortgage haves and have-nots widens.
Schemes to help first-time buyers such as Help to Buy (HTB) are drying up, and with the outlook for house prices dipping in light of Brexit and a consumer squeeze, so is the appetite to lend to first time buyers. Lender insurance products, which helped lenders cover the risk associated with high LTV lending, are also falling out of use. Amtrust found only one product available for first-time buyers looking to buy a home worth £157,000 – the average first-time buyer property price.
Simon Crone, Commercial Director, AmTrust International, Mortgage and Special Risks, said: “As 2017 has progressed the mortgage price war which appears to be raging has not taken in those seeking high LTV mortgage products. If anything, the differential between rates has grown and as those with 25% deposits benefit from significant lender competition, those who are reliant on access to 5%-deposit loans have seen the cost of their monthly mortgage payment rise.
“The end of HTB2 marked something of a watershed with a number of scheme members continuing to offer loans at 90% but not proceeding with their 95% LTV products. While a number of lenders are utilising private mortgage insurance in order to keep their risk down and maintain their commitment to first-time buyers, we are clearly seeing the start of a new environment for high LTV mortgages. Especially when you consider real access to 95% LTV loans, compared to what might seemingly be available.
“Indeed, it’s only when borrowers are looking to buy a more expensive property, and therefore put slightly more deposit down – albeit still 5% of the property price – that the market opens up slightly with more product availability. Are we effectively working in a mortgage market that forces first-time borrowers to look at higher-priced properties in order that they have more mortgage products to choose from?
“The catalyst provided by the introduction of HTB2 is in danger of being lost, and with a General Election on the horizon plus the ‘Brexit negotiations’ to follow, we could be looking at a much more subdued high LTV market for a longer period of time than is necessary.”
What can you do?
The first thing to say is speak to a broker. Mortgages are very personal things and searching for them on comparison sites does not give you a proper reflection of what may be out there for you. Brokers often have personal relationships with lenders – they know which lenders are more disposed to certain aspects of an application and which are more likely to turn their noses up.
Trinity Financial mortgage brokers are offering Good With Money readers 50% off fees. Just email Goodwithmoney@
The second thing to do is: save in a Help to Buy ISA or Lifetime ISA, if it is your first property purchase. Saving as much as you can into these is a good idea because you get a 25% government top-up.