Mortgages  

Is competition to attract first-time buyers nearing boiling point?

Is competition to attract first-time buyers nearing boiling point?

Record-low rates in the mortgage market have clearly helped boost the number of first-time buyers getting a foot on the housing ladder.

FTB numbers hit a 12-year high of 370,000 last year, according to UK Finance, and accounted for 50 per cent of housebuyers. Data from Moneyfacts shows not only are rates on 90-95 per cent loan-to-value mortgages cheaper than before, on average, but also that there are more of these deals available.

Table 1 compares the average interest rate on two-year fixed-rate mortgage deals with their equivalents five years ago. Rates have fallen in all cases, but the drop is most significant for the 90-95 per cent LTV tiers – as is the increase in the number of products available.

Table 1: Two-year fixed-rate mortgages, 2014 v 2019

Loan -to-value60%70%75%80%85%90%95%
Change in number of mortgages available5-555527014473
Change in average rate (pp)-1.06-1.3-0.85-1.12-1.23-1.65-2.08

Source: Moneyfacts. Copyright: Money Management

Competitive edge

Moneyfacts spokesman Darren Cook suggests that providers appear to have sacrificed some risk by lowering rates at the higher LTV tiers in a bid to maintain their competitive edge. He also points to the narrowing of the rate spread between lower and higher LTV deals. For example, the difference between average rates on 70 and 90 per cent LTV products has fallen from 0.46 per cent in 2014 to 0.11 per cent this year. This contrasts with the spread between 60 and 70 per cent LTV deals, which has come down from 0.88 per cent to 0.64 per cent over the same period.

Mr Cook highlights intense competition and squeezed margins, particularly in the riskier, higher LTV space, and suggests that lenders are unlikely to be able to decrease interest rates much further.

However, the trends have raised alarm in some quarters, with mortgage lending activity attracting closer regulatory scrutiny.

In a speech to the Building Society Association to mark its 150th anniversary, Sam Woods, head of the Prudential Regulation Authority, warned that regulators “should be watching lenders like a hawk”. 

Referencing the price war in the mortgage market over the past couple of years and the negative impact on net interest margins for lenders concentrated in mortgages, he pointed to a dramatic fall in spreads, a marked shift in the high-LTV share of new lending, and a significant increase in firms’ appetite for higher LTV and higher loan-to-income lending. The UK housing market, he said, is the biggest single loan exposure for deposit takers and the biggest liability ofUK households.

High housing costs

Yet despite record-low mortgage rates, particularly on higher LTV deals that are more likely to attract FTBs, affordability remains an issue. A survey of employed non-homeowners conducted by Close Brothers found that 65 per cent still aspired to be homeowners. 

However, almost half believe they will never be able to afford to get on the property ladder because of the high cost of living. Around 27 per cent of all respondents, both homeowners and non-homeowners, revealed they are spending more than half their income on housing costs, while 10 per cent are spending more than 70 per cent.