Small deposit mortgages fail to take off

Small deposit mortgages fail to take off

The share of gross mortgage advances based on 10 per cent deposits or less was down 2.8 percentage points in Q2 2021 compared to the same period last year, when the pandemic first hit.

Taking up just 2 per cent of the entire mortgage lending market, 90 per cent or higher loan-to-value mortgages were still struggling to regain momentum between April and June.

All the while, the share of mortgages advanced in Q2 with LTV ratios exceeding 75 per cent reached 39.6 per cent, 3.2 percentage points higher than a year earlier.

Lenders began exiting the 95 per cent LTV market in Q2 last year to avoid the risks which come with small deposit holders, who were hit particularly hard during a pandemic as many found themselves without regular income.

Some specialist lenders re-entered the 95 per cent LTV market in March, a month before the government launched a guarantee scheme designed to entice high street lenders back to the small deposit market.

Despite this scheme, alongside a surge in mortgage applications overall as a result of the stamp duty holiday, there were still fewer small deposit borrowers accessing the market in Q2 this year than in the first months of the pandemic.

Advisers said high rates could be to blame.

Chris Sykes, associate director and mortgage consultant at Private Finance, told FTAdviser he had a client who faced rates on 85 per cent LTV mortgages in April this year which were higher than the rates on 90 per cent LTV in June 2020.

On June 10 2020, they could take out a two-year fixed 90 per cent LTV mortgage at an interest rate of 1.81 per cent.

But by April 19, this same borrower was faced with a two-year fixed 85 per cent deal at 2.5 per cent.

“With an extra 5 per cent deposit, they were still facing more interest.”

Sykes said rates have since come down “a fair amount”, and he expects them to continue to fall, particularly as more lenders use bonus incomes and broaden their higher LTV product ranges.

Virgin Money is the latest to launch a range of 95 per cent LTV mortgages, set to go live this week.

“A lot of young, first-time buyers are also still waiting for rates to come down and for the house price bubble to shrink,” said Sykes. “These buyers are still waiting on hybrid working situations too.”

Demand is currently so high compared to supply, particularly in villages, that Sykes said a colleague saw a queue up the road for a Yorkshire Dales property advertised just a day earlier.

“These conditions are somewhat inflating figures of average transactions. But there are also some bargains, with London flats selling for £100,000 less than a year earlier. It’s completely region dependent.”

Sykes’ clients - which include a fair few buy-to-let investors - expect a flat housing market for the next couple of years, with some provisions for a slight decline, he said.