Of course, ‘selective lending’ seems to be a common-sense approach in any circumstance, but it also seems somewhat instructive for a lender, which I think it’s fair to say sits outside the top six, to comment in this way.
Let’s be in no doubt that over the last couple of years, we’ve seen a huge amount of competition fixed on lower LTV borrowers. You’ll recall it was something of a bun fight around 60 per cent loan to value (LTV) at various times particularly last year post-stamp duty holiday, and when you have products available below one per cent, fixed for five years then you’re acutely aware of how that competition is working itself out.
Those rates – available around the third quarter of last year – have moved up since then, and again I think it’s fair to say, that it is the major balance sheet lenders who tend to determine what level those products are offered at, with some notable exceptions.
Managing margins
It leaves the wide tier of lenders who might be considered to be below that level with something of a consideration to make. How do you compete if you still want to be fishing in those low-risk borrower waters while making the margin you need for the cost of funds you have?
The answer is, it’s very difficult. Which is perhaps why when rates at those low LTV levels began to rise towards the end of last year, that we actually saw rates at higher LTVs begin to fall.
Lenders were migrating away from lower LTVs to try and secure greater levels of business from higher LTV borrowers.
Margin in all this is crucial. Virgin Money said it improved its margin to 177 basis points in the last quarter of 2021 but expects it to fall to 175 basis points for this financial year.
Others are likely to be facing a similar situation, in a different market than last year. Where will these lenders look to in order to secure the volumes of business they need for the margins they are willing to accept?
The mainstream space is incredibly congested which means lenders, particularly regional building societies, often look at the niches that exist away from the lower LTV ranges. Hence, we tend to see a much more focused approach on high LTV borrowers, especially since the government guarantee was brought into play, acting as the catalyst the high LTV market needed.
High LTV focus
My own view is that the focus on higher LTV will continue throughout the year, especially as we anticipate purchase activity will be down on 2021, and there may be more demand for remortgaging at higher LTVs.
Even if there is an anticipation of less purchasing and more remortgaging, the individual lending targets for both are unlikely to have gone down within each organisation. Lending targets tend to go up regardless, especially in light of last year’s activity.
This could be good news for first-timers with smaller deposits, and those existing homeowners who still need high LTV products. Deemed higher-risk borrowers, lenders can utilise risk-mitigants like private mortgage insurance to lower that risk and still secure the margin they need.
For a sector that pre-March last year was crying out for more 95 per cent LTV mortgage products, 2022 could be a year when we see much more activity here.
Competition may well drive these lenders up the LTV risk curve, but using the right insurance products, they should be able to secure the type of business they want from the borrowers who need it.
