The wider ramifications of a closed 95% LTV market

Surely, even if I only have a 5% or 10% deposit, the market is booming, isn’t it? And therefore, I should strike while the iron is hot, and take advantage of the stamp duty holiday which is also going to provide me with some considerable savings.

Of course, the truth of the matter is somewhat different, because as advisers will know only too well, for those potential first-timers – especially those without the support of the Bank of Mum & Dad – not only are they still required to come up with vast amounts of deposit monies to even get anywhere near a mortgage, but recent price rises mean those requirements have also gone up, and to top it all there is a dearth of mortgage products for them to access.

If we thought we were anywhere close to solving the problem of incredibly small numbers of high LTV product supply, then the following should disavow you of that notion.

Let’s take the deposit situation first. According to the most recent house price index from the Halifax for November, the average property price is now £253,243, which was a 1.2% monthly increase, a 3.8% quarterly increase, and a 7.6% annual increase. Back in June – just after we’d come out of lockdown – the average price was £237,616. That’s a 6.5% increase in less than six months.

It means that buyers need close to a thousand pounds more in deposit now than they did in June in order to have 5% to put down. The corresponding figure for a 10% deposit is close to £1,600. You can see where any stamp duty savings have been heading.

And what about high LTV product supply? Well, should your client currently want to try and find a 5% deposit mortgage, the pickings are slim to say the least. According to MoneySavingExpert – and I’m conscious this might not cover every single possibility but it seems fairly accurate – if you want a two-year deal of any type, you currently have four product options; for all terms and all product types we are up to 13.

However, one of those lenders which currently appears in the ‘Best Buy’ lists for product availability at 95% is Buckinghamshire Building Society, which has unfortunately just had to temporarily suspend accepting any new applications because it says it has experienced ‘very high demand’ for its products.

Now, it’s not known just how much of that demand has been for its 95% LTV product offering but I guarantee – given it is one of barely a handful of lenders that has been recently active in this space – it would certainly have been on the radar of advisers, given the paucity of other product options for those with 5% deposits. I suspect demand for its 95% products has been high.

So, what happens if Buckinghamshire BS is not an option at the moment? Of those four two-year product options, all are from this lender. Of the 13 all-term/all-type product options, eight are from the Bucks. By my reckoning that means that if you want a two-year 95% deal, whether that be fixed or discounted variable, you currently have no options; if you’re willing to look at other terms, you have five products available.

To my mind, that pretty much tells you and anyone considering an attempt to purchase with just 5% deposit that the market is closed. Now, you might think that this is just the way things are at the moment but also consider how many clients you have put into homes over the years with just 5% deposit. Think about yourself, your friends and family – how many of them started the home-owning journey with just 5% deposit and still made it happen? I suspect there will be many, many examples.

It’s not much better at 10% deposit but it is better, and in recent weeks there appear to have been a number of lenders creeping back in. Again, take out the Bucks and there are currently 26 products for those who explicitly want a two-year deal, for those willing to look at other terms there are just under 80.

So, having that 10% deposit does make a big difference in terms of product options, but again at current average house prices it means your client will need to stump up just over £25k to get on the starting grid. I make the point again – how many first-timers are in such a position, especially if there is no family support available?

As we move into 2021, a continuation of this high LTV trend is soon going to have major ramifications for the mortgage and housing market, because the new-blood that it relies upon won’t have the outlets they need to purchase. The Government has talked about its own new scheme to help, but we still await detail and action.

Perhaps a new year will result in a change of strategy from those lenders who have vacated the high LTV space, particularly 95% LTV. There’s no doubting that it is warranted and those worried about risk – at whatever LTV level - should obviously be utilising private mortgage insurance in order to return to lending. This current situation however is simply not sustainable and the damage will continue to build up, the longer it continues.