Low deposit borrowers still up to £175k short of average property prices
Considering current property prices and income data, a five per cent deposit would leave the average purchaser as much as £175,246 short on their home based on the maximum amount most lenders are willing to give.
Earlier this year, a raft of lenders tightened loan to income (LTI) multiples for borrowers on lower incomes to around four or 4.5 times income. This was also restricted for those requiring mortgages above 80 per cent LTV.
The recent wave of 95 per cent LTV mortgages has been no different and includes criteria that allows maximum income multiples of no more than 4.75.
The most generous LTI is 4.75 times income which is being offered by Skipton Building Society and is available to all buyers including first-timers.
Atom Bank will also lend up to 4.75 times income for borrowers with a single or joint income of £100,000 or more. For single or joint incomes under £100,000 the digital bank will only lend up to 4.5 times income.
Other lenders that have launched 95 per cent LTV mortgages both with and without the government’s scheme have capped LTI at multiples between four and 4.5 times their income.
Statista puts the average age of an English first-time buyer living outside of London at 32, while those in the capital buy their first homes at the age of 34.
Its data also says the average salary for men in the UK aged between 30-39 is £34,567 while for women, it’s £30,258.
Based on LTI multiples for 95 per cent LTV mortgages, the average man buying his first property on his own would be able to borrow up to £155,551 and a woman would receive up to £136,161 with an LTI of 4.5.
According to Rightmove, the average asking price of a home in the UK currently stands at an all-time high of £327,797.
This means a five per cent deposit of £16,389 combined with borrowing the maximum £136,000 would leave female buyers £175,246 short on the £311,407 needed to make up the shortfall.
Male purchasers would be down £155,856.
Looking at properties worth the average price paid by first-time buyers in March, reported as £203,564 by Rightmove, purchasers will still need to earn at least £45,000 either on their own or as joint borrowers to get a 95 per cent LTV deal.
Considering the maximum borrowing amount of £164,193 for a single purchaser, the North East would be the only affordable region with an average property price of £161,994.
Halifax offers the cheapest two-year fixed 95 per cent LTV, priced at 3.73 per cent. Putting down a five per cent deposit in the North East would mean monthly repayments of £789.55.
The cheapest five-year fix is offered by Coventry Building Society and priced at 3.99 per cent. For the same property in the North East, monthly repayments would be £803.
Chris Sykes, associate director and mortgage consultant at Private Finance, said this was not a new problem as prices had outstripped affordability for years.
He said this was also not just an issue at the upper 95 per cent LTV lending tier but added that banks being more “stringent” to higher risk loans made it more prevalent.
He added: “It is incredibly hard at any loan to value for a single first-time buyer to get a home unless you are living somewhere with much below the average property values or they have much higher than average income.
“It often is not possible for the average person to get the average property, either they have to settle for less or cannot get anything at all.”
Mark Robertson, partner at Chadney Bulgin said assessments were based on the regulator’s view of affordability.
He said although underwriters did factor in estimated and actual costs, they did not always consider potential individual circumstances.
“Some of these buyers will have rented and may well have been paying higher rents. I don’t think it’s a fair reflection.
“It should be true affordability of the individual. A single person on £34,000 might have more disposable income than a couple with a child,” he added.
End of the single buyer?
Robertson said these restrictions could lead to fewer people buying on their own and choosing to purchase with a partner, family member or even friends.
Based on the average pay figures, a joint application with mixed gender applicants with a combined income of £64,825 could borrow up to £307,918 on a 4.75 income multiple.
Two women could be able to borrow up to £287,451 while a lender could offer two men as much as £328,386. In this scenario, two male applicants could potentially afford a property at the current average price as stated by Rightmove.
However, this will depend on differing lender criteria.
For example, Buckinghamshire Building Society will either loan up to 4.5 times the first income plus 3.5 times the second income or will lend four times the joint income. TSB caps income multiples at 4.25 for applications where any borrower is self-employed.
Robertson also questioned whether people living in areas with lower property prices would be making salaries which would allow them to borrow enough to purchase.
According to Payscale, the average salary in the region with the most affordable property prices is £27,000. On an income multiple of 4.5, this would put the borrower’s maximum potential at £128,250, which falls short of the North East average property value by £33,744.
A borrower here would actually need a 21 per cent deposit of £34,018 to make up the difference, rather than a five per cent deposit of £8,099.
More options for buyers
Rachel Dixon, mortgage adviser at RH Dixon, agreed that affordability constraints even for the cheapest properties was an ongoing issue.
However, she said it was still a positive to see more options on the market at 95 per cent LTV as people would “at least have a shot at buying if they meet all other criteria”.
Adam Wells, co-founder of Lloyd Wells Mortgages, said the same as many of his clients were disappointed to find they would need to double their deposits when 95 per cent LTV mortgages disappeared last year.
He also said the low borrowing power would not necessarily be an issue for most first-time buyers.
“Although the average house price is £327,797, most first-time buyers aren’t looking to buy a three-bed property and will only be in their first home for a few years. Their buying power will improve if they are able to purchase with a partner, friend or sibling.
“It can also open up the conversation to other ways of purchasing such as the Help to Buy scheme, shared ownership and shared equity. Anything that can be done to help more people purchase their first home has to be a good thing,” Wells added.
Leeds BS adds two-year 95 per cent LTV mortgages
The lender is not using the government’s mortgage guarantee scheme and relaunched its offering last week with a pair of five-year fixes.
The latest two-year deals come with an interest rate of 3.8 per cent for the £499 fee version and at 3.95 per cent with zero fee.
Both products have a free standard valuation up to £999 and are available for first-time buyers and home movers.
“We recently returned to 95 per cent LTV lending and are now extending our range to offer short term fixed rate mortgages, improving the choice for borrowers and helping more people achieve their dream of owning their own home,” said Matt Bartle, director of products at Leeds Building Society.
“It’s important to us to assist those buyers who are not well served by the wider market, including those with smaller deposits, to allow more people to have the home they want.”
IMLA: Mortgages outside government 95 per cent scheme may be ‘better value’
The government’s scheme went live today with Halifax, Barclays, HSBC and NatWest launching their 95 per cent loan to value (LTV) offerings – although NatWest’s range is only available direct from the lender.
Santander’s products go live tomorrow while Virgin Money will add a set of deals next month.
However, several lenders including Accord, Bank of Ireland, Skipton Building Society and Atom Bank have already unveiled offerings independent of the government scheme.
IMLA executive director Kate Davies (pictured) noted the guarantee scheme had clearly given lenders more confidence to return to this part of the market, but prices may not be comparable.
“We will need to wait to see how borrowers respond this time around,” she said.
“Price will clearly be a factor – and many of the non-government-backed 95 per cent products which have recently been launched may well represent better value for borrowers.
“There is a big role here for intermediaries to demonstrate their expert knowledge of the market and steer borrowers towards suitable and affordable products.”
At present it appears lenders are coalescing around interest rates of four per cent for their two-year fixes, with five-year versions slightly higher.
However, this may change as lenders start to compete for business.
Davies also noted there were some significant drawbacks to the scheme and so it was not a surprise some lenders had chosen not to use it.
“Many may be surprised to see that just a few lenders have said they will offer these mortgages and that some of those who have signed up have made it clear that their products will not be available for new-build properties,” she said.
“The scheme excludes applicants who have any form of credit impairment, and also lenders who securitise loans.
“When these factors are added to the additional costs associated with the scheme, many lenders are preferring to offer their own 95 per cent loan to value mortgages.”
Early movers are shaping the 95 per cent LTV market – Hunt
Albeit these were from lenders not using the scheme, which has gone live today, at all.
Accord, followed by the Bank of Ireland, were first to bring five-year 95 per cent LTV fixes to market, and more lenders have now entered this under-served space.
I’m also aware of a major mainstream lender who will also make their entrance at 95 per cent not using the scheme, although this is likely to be after April.
What is interesting about those lenders who launched before today is they were not part of the government’s guarantee scheme, although I have little doubt they would not have appeared were it not for the announcement.
The cost of using the guarantee at around 90 basis points may prove prohibitive for some, and they are likely to feel they have a competitive and pricing advantage by opting out.
Intervention was required
However, this is not to disparage the scheme because it was undoubtedly required.
Much like the Help to Buy guarantee scheme did more than five years ago, we’ve seen government support in this area giving lenders confidence, but also a market to aim at.
At time of writing those lenders using the government scheme have clearly yet to launch, and there’s a lot to be said for getting out in front of those who had to wait.
So well done to those lenders who won’t be part of the scheme and are not waiting for the grass to grow under their feet.
They are effectively shaping the new 95 per cent LTV market right now, and those using the scheme will need to react.
From that sense, it’s instructive many have launched five-year fixes – as you will know, lenders who take part in the government scheme have to offer such a product as part of their range – and the pricing seems competitive.
Will those lenders using the scheme be able to match this?
Shaping the space
Accord have launched at 3.99 per cent while Bank of Ireland are offering 4.05 per cent, and it is also enlightening to see that both have put £500,000 maximum loan sizes on their products, and specifically outlined how these mortgages are not available for new-build properties.
In a sense we already appear to be following the line well-travelled from the Help to Buy scheme.
Then it wasn’t so much those lenders using the government scheme that truly shaped the 95 per cent mortgage space, but those who didn’t, choosing to cover the risk themselves or opt for private mortgage insurance.
This is a route that will be familiar to building societies in particular, and one you suspect, many will be utilising in the months to come.
From a market point of view, these launches couldn’t really have come at a better time.
Higher LTV product supply just made a big leap – I expect it to jump much further forward throughout (and beyond) the spring.
Santander reveals rates ahead of 95 per cent LTV launch
From Tuesday 20 April, borrowers with a five per cent deposit will be offered a choice of three deals backed by the government’s mortgage guarantee scheme.
At 3.99 per cent, borrowers can opt for a two-year tracker or a three-year fixed rate mortgage. At 4.09 per cent families can fix for longer with a five-year deal.
Five-year fixed rates are a compulsory requirement for lenders using the mortgage guarantee.
None of the 95 per cent mortgage deals come with a product fee and all have a free valuation.
Borrowers who want to buy a new-build property will need to use the Help to Buy equity loan scheme. The Help to Buy equity loan scheme is now only available to first-time buyers.
Repayment mortgages only will be offered on houses priced up to £600,000 or flats and leasehold properties up to £400,000. Under the terms of the scheme, all deals are open to first-time buyers and homemovers.
Brad Fordham (pictured), head of mortgages at Santander, said: “We know that buying a home is expensive and finding the money for a deposit and the upfront costs can sometimes prove a barrier to potential homeowners.
“We’re pleased to be part of the government’s mortgage guarantee scheme by offering customers a range of 95 per cent LTV mortgages with the additional support of no upfront fees and a free valuation.”
Chancellor Rishi Sunak announced the 95 per cent mortgage guarantee scheme during the March Budget.
Under the terms of the scheme, the government will guarantee the amount of the mortgage lending over 80 per cent, which is 15 per cent of the 95 per cent loan to value mortgage.
Borrowers will be subject to Santander’s normal affordability checks. The mortgage deals are available through the intermediary and direct channels.
Barclays unveils pair of 95 per cent LTV mortgages
The deals are fee free with a two-year fix at 3.99 per cent and a five-year fix at 4.09 per cent.
Loans are available between £25,000 and £570,000 and new-build properties are excluded.
A Barclays spokesperson said: “We are looking forward to supporting customers in their next steps as homeowners with the launch of two new 95 per cent LTV products.
“These products are available under the government’s mortgage guarantee scheme and are open for applications from Monday.”
The lender is also extending the maximum loan size on applications higher than 85 per cent LTV.
For houses with a loan to value of more than 85 per cent, the maximum loan has increased to £570,000, and for flats it has risen to £275,000.
This is available on all purchase applications including first-time buyers.
NatWest 95 per cent LTV deals only available direct to start
The products will be available on 19 April and includes two deals, but will only be available direct to begin with.
The bank did not confirm when the range would be available through brokers, but said it would be in due course.
There is a two-year fix with a rate of 3.9 per cent and a five-year fix set at 4.04 per cent. Both products have no fees and there are no details on maximum loan sizes yet.
Employed and self-employed borrowers will be eligible with the mortgages open to first-time buyers and home movers.
Miguel Sard, managing director of home buying and ownership at NatWest said: “We welcome the government’s new mortgage guarantee scheme to give further support to those with smaller deposits.
“For those customers, particular younger or first-time buyers, saving up for a big deposit can often be difficult, and we know people in these groups are some of the hardest hit by the effects of the pandemic.”
He added: “A government-backed scheme will help segments of the market for whom home ownership has felt far out of reach in recent months.”
Rate reductions and ERC changes
The bank has also reduced rates by up to 0.15 per cent on its residential range.
Two-year fixed residential products have had rates cuts up to five basis points (bps) including the 70 per cent LTV offering with a £1,495 fee. This has been reduced to 1.28 per cent from 1.33 per cent.
The fee-free two-year fixed product at 90 per cent LTV has been reduced from 3.43 per cent to 3.38 per cent.
The Help to Buy range received the largest reductions, including the five-year fixes at both 70 and 75 per cent LTV both reduced by 15 bps to 1.93 per cent.
The two-year fixes for Help to Buy at 70 and 75 per cent LTV have been cut by 10 bps to 1.78 per cent and £250 cashback has been added.
The bank has also updated its early repayment charges (ERCs) system and charges will no longer decline by one percentage point each consecutive year.
From 19 April, ERCs for a five-year fixed will begin at 4.5 per cent, previously five per cent.
The charge will then drop by 25 bps until the fourth year of the fixed period, where it falls from four per cent to 2.5 per cent. The ERC will then drop to one per cent in the final year of the fixed rate period.
ERCs for two-year fixes will start at 1.5 per cent then drop to 0.75 per cent and two-year trackers will begin at 0.5 per cent then go down to 0.25 per cent.
Eager borrowers refusing to wait for mortgage guarantee scheme, say brokers
So far, Halifax and Santander are the only banks to announce details of their offerings which go live next week.
Other lenders are expected to launch their products over the next fortnight.
However, the lack of information in the six weeks since the scheme was announced has resulted in some brokers receiving little to no enquiries from borrowers who were ready to purchase.
Nik Mair, director of London Mortgage Solutions, said borrowers were not willing to wait.
“People are just going for what’s available now. Other lenders have come to market with 95 per cent LTVs so my clients have just been going for that.
“It’s not as if they’re getting a preferential rate and all the standard criteria still applies,” he said.
Dina Bhudia, managing director and chief executive of P2M Asset Management, said while the scheme gave other lenders the confidence to return to the low market, she questioned whether it was needed as her clients were preferring to raise their equity instead.
She said: “I’ve personally had no-one ask me about the mortgage guarantee. Probably because a lot of my cases are vanilla and people are resorting to the bank of mum and dad.
“So, they have larger than five per cent deposits.”
Christopher Hall, mortgage adviser at Mortgage Guardian, said it also came down to properties not fitting the criteria of the scheme as many first-time buyers were going for ineligible new-build properties.
With borrowers seemingly showing no interest, Hall predicted this could be because they were planning to go directly to the banks once more details revealed as they felt comfortable approaching the household names.
He said: “Perhaps this is a disadvantage for brokers as a lot of customers will know the main lenders subscribing to the scheme and go direct instead of through a broker.
“I don’t think the publicity is so high for the other 95 per cent LTV products. It is on social media with the broker community, but I don’t think public awareness is quite well known.”
Mortgage guarantee future
Bhudia and Mair said the uncertainty of what the scheme might look like for mortgage holders in the future also made them unwilling to suggest it to borrowers without more information.
Bhudia said she would rather wait to see the small print to work how it might affect borrowers 30 years down the line.
Mair echoed these sentiments and said there was no point in telling a client to hold off if a property had been decided upon and other options were immediately accessible.
“At least that way there’s no further complications about how it’s backed because we don’t have enough information and can only advise on the products that are available to us,” he added.
Mitul Patel, mortgage adviser at Lemon Tree Financial, was also wary of the initiative.
He said: “They’re commercial organisations at the end of the day and it still has to be beneficial for them. No one gives away something for nothing.”
In contrast to other broker experiences, Mitul Patel, mortgage adviser at Lemon Tree Financial, noted that there was sustained interest in the scheme, with clients continually calling about it since the day after the announcement.
He said he was spending time trying to calm them down and remind them there was not yet enough information. He also said certain clients seemed to have high expectations of what they would be able to borrow, with some looking at properties worth £750,000.
Patel added: “I think the messaging and the fact it was announced by the government made it sound appealing. So, I’ve tried to manage expectations and say be prepared to not qualify.
“Some think it’s 95 per cent on anything they want to buy. A lot of people are looking forward to this. My advice is to let it settle down, see what comes out next week and see your options thereafter.”
Santander to launch 95 per cent LTV mortgages on Tuesday
However it has not released many product details including interest rates, fee information and fixed or variable periods.
The deals are only available for first-time buyers and movers and do not include remortgages or self-employed borrowers. New build, shared ownership and Right to Buy applications are also excluded.
The government scheme permits a maximum property price of £600,000, the property must be the only residential property owned by the applicant and must be owner-occupied, and the mortgage must be on capital and interest payment basis.
Additionally Santander limits the maximum value of flats it lends on to £400,000.
Therefore, the maximum loan is £570,000 for non-new build houses and £380,000 for non-new build flats. And the maximum loan to income is 4.45 times.
For employed applicants Santander will require the latest payslip plus the latest three months’ personal bank statements.
Applicants must complete the lender’s mortgage guarantee declaration to confirm that they do not own any other property.
Yesterday Halifax was the first lender to reveal the details of its offering through the government’s 95 per cent LTV guarantee scheme.
It is launching two-year and five-year fixes with £999 fee and fee-free versions of each product – the two-year fixes are at 3.73 per cent and four per cent respectively with the five-year options at four per cent and 4.2 per cent each.
TSB launches 95 per cent deals
Rates start from 4.04 per cent and deals come with £500 cashback.
TSB is offering the deals outside of the government’s 95 per cent mortgage guarantee scheme.
Borrowers can choose from a five-year fixed rate which has a choice of three and five-year early repayment charges which are open to both first-time buyers and house purchases. A zero fee and £995 fee option are available. Rates for the five-year fix with three-year early repayment charges start from 4.24 per cent.
A stepped down first-time buyer deal, with zero fee, has annually reducing rates until 31 August 2026. In year one the rate is 4.44 per cent and in the final year the interest rate is 4.09 per cent.
A ten-year fixed rate is on offer between 85 per cent and 95 per cent LTV, with a five-year early repayment charge. The deal is priced at 4.45 per cent and has no product fee.
Lending above 85 per cent LTV can only be secured on houses and bungalows.
Borrowers who earn £40,000 or less will be subject to an income multiple of 4.25 times earnings while those earning more than £40,000 will be offered a mortgage of up to 4.49 times their income.