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High LTV and LTI deals hit hardest as capital raising plummets – FCA research

  • 12/10/2020
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High LTV and LTI deals hit hardest as capital raising plummets – FCA research
High loan to value (LTV) and high loan to income (LTI) mortgages were the most severely hit elements of the market affected by the pandemic lockdown earlier this year.


Research conducted for the Financial Conduct Authority (FCA) found while interest rates rose sharply for the highest LTV products, rates for products at lower LTVs initially fell.

And they noted the number of borrowers withdrawing equity when remortgaging and the value of equity taken when doing so fell sharply.

The researchers also compared the lockdown to the global financial crisis of the late 2000s, noting that while there were similarities in the overall patterns, this year’s event had been much steeper and looked to be bringing about a much quicker recovery.


Product numbers shrink

In the Occasional Paper No. 57: Mortgage market disruptions, researchers from the FCA, London Business School and Imperial College Business School, analysed mortgage market trends during the first eight months of 2020 as the Covid-19 pandemic unfolded.

Comparing the results to the financial crisis of 2007-09, they noted the shorter, sharper duration and rebound and differing prevailing market conditions impacted the types of deals offered.

“Both the 2020 pandemic and the financial crisis of 2007-09 saw a fall of about 60 per cent in the number of products offered in the mortgage market,” they said.

“But while this decline materialised in less than a month during the pandemic, it took more than 18 months to go from peak to trough during the global financial crisis of 2007-09.

“Furthermore, the share of offered deals with an LTV above 90 per cent went from 10 per cent to two per cent between March and June 2020, and it was still two per cent as of August 2020, whereas it declined from 40 per cent to two per cent of the total supply between October 2007 and June 2009.”


Surprising rate moves

Perhaps surprisingly where prices are concerned, in both crises although the average interest rate increased for products above 90 per cent LTV it decreased for deals offered for mortgages below 75 per cent LTV.

In April 2020 mortgage deals with an LTV below 75 per cent saw an immediate drop of their average introductory rate of about 70 basis points.

Those slightly higher mortgage deals with an LTV between 75 per cent and 90 per cent saw a delayed drop of their average introductory rate of about 50 basis points.

But in contrast, mortgage deals above 90 per cent LTV witnessed a gradual increase of 25 basis points, averaging a rate of 3.6 per cent at the end of 2020 Q2 and 3.8 per cent in the subsequent months of July and August.


High LTV and LTI suffer

And the recovery has been similarly swayed towards lower LTV borrowing.

By the end June 2020 Q2, the number of mortgages above 90 per cent LTV was still 60 per cent below the June 2019 level.

However, originations for mortgages below 75 per cent LTV was only 20 per cent down on the previous year.

When analysing loan to income similar patterns emerge.

Mortgages purchased with an LTI less than three times income fell by almost 40 per cent at the lowest point, those between three and four times’ income dipped about 45 per cent, while mortgages with an LTI of more than four dropped about half.

However, all three had recovered to about 25 per cent below the previous level by the end of the analysis.


Remortgaging equity extraction falls

The researchers also considered the number of borrowers taking out equity from their home when remortgaging with a new lender, and the average value of that equity.

First, they found the share of remortgagors extracting equity declined significantly during the pandemic.

It was down by 20 per cent in May compared to the previous year but recovered slightly to 15 per cent below the 2019 mark in June.

Furthermore, the amount extracted in Q2 2020 was typically around 10 per cent smaller than during the same quarter of 2019, with some sign of a possible recovery starting in June.

“In summary, remortgaging activities do not seem to have been halted by the pandemic but the ability or willingness of households to extract equity has been reduced, both along the extensive margin of the number of mortgagors extracting equity and along the intensive margin of the withdrawn amount chosen by those refinancing their loan,” they said.



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