However, inflated house prices have pushed a number of borrowers into different LTV tiers meaning they now have to pay significantly higher rates on their mortgage loan than previously expected.
So, this week, Mortgage Solutions is asking: Should there be some leeway for borrowers just outside of LTV limits?
I was loading into play Call of Duty one night and a friend asked me: ‘House for £600,000 with a £75,000 deposit, for 30 years. What do you think the monthly repayment will be?’
After opening Twenty7Tec on the other tab, I told them: ‘It will be £2,300 ballpark but ideally you would want a £90,000 deposit, because then you would be down at 85 per cent LTV rather than 90 per cent LTV. Then you’d be paying around £2,000.’
It was then I was reminded of a debate I had the other week. My friend was not at 90 per cent LTV, he was at 87 per cent LTV, right in the centre of two LTV brackets.
Which begs the question as to why we have arbitrary rigid five per cent brackets?
If my friend would be paying £2,300 on the upper bracket and £2,000 on the lower bracket, wouldn’t it be rational to have a rate in the middle where he’d be paying £2,150?
Likewise, if I was a lender with an uncompetitive product at 80 per cent LTV and a competitive one at 85 per cent LTV, I’d be asking the credit risk department to consider increasing the maximum LTV by just 2.5 per cent.
What difference might a 2.5 per cent LTV make to risk? Very little. What difference does 2.5 per cent LTV make when it comes to winning new business? It’s an untapped market.
I’ve made a business case for lenders to adopt smaller brackets of up to 2.5 per cent. Meanwhile, some of my colleagues ask why have brackets at all?
Just have the sourcing program talk to lenders’ API to provide quotes based on risk.
The biggest difference between brackets at the minute is between 90 per cent and 85 per cent.
Using Halifax as an example, today their two-year fixed rate is 3.09 per cent at 90 per cent with a £999 fee. If you have a 15 per cent deposit then the rate drops to 2.48 per cent, a difference of 0.61 per cent.
According to Rightmove, the average house price in Bristol is £336,637. The difference between a 10 per cent deposit and a 15 per cent deposit is £16,832.20.
Taking this into consideration, you could argue that a product at 87.5 per cent would make more sense.
With a lot of lenders, such as HSBC, once you are able to put down a deposit of 15 per cent, the affordability becomes more generous.
With the risk of property prices dropping, depending on the stamp duty holiday extension in the budget on 3 March, a buyer completing with a 15 per cent deposit today, might find themselves with equity of less than 15 per cent in a few weeks’ time.
The best thing to do is to speak to an independent mortgage adviser and make sure that you are not stretching yourself and that should anything happen you are fully protected, should your situation change.
In simple terms it is a good idea, LTV bands are banks pricing for risk so it would make it easier for borrowers and be good for borrowers to take advantage if they can manage an extra one to two per cent but not an extra five to ten per cent.
However, in practice the mortgage market is already hard enough for many buyers to navigate without a broker.
Introducing smaller LTV bands would make things more complicated for lender product teams as well as more complicated for buyers not using brokers to navigate the market.
Pricing for risk is done by some lenders, specialist building societies or private banks mostly, but mainstream lenders are not equipped to deal with the complexities behind pricing in this way.
We may see open banking one day meaning lenders embracing technology can price for risk, but it could make it very complex to insure you are getting the best deal when you don’t know what they would be until submitting an application to a lender.
I do not think this is relevant to the underwriting of a case, it is more relevant only to the pricing of a case, as generally someone’s borrowing power doesn’t change with the LTV until you get to the high 80 per cent LTV and over levels.