What’s next for 90% LTV mortgage lending?

01/09/20

As Head of Mortgage Products, there’s one question I’ve continually been asked as the mortgage market has kick-started over the last four weeks. No, it’s not “are you on mute?”, though that’s probably a close second. In almost every recent (Teams/Zoom) meeting, be it with Skipton BDMs, brokers, the press, or even my own friends and family, the burning question remains the same: “when will I be able to get a 90% LTV mortgage?”.

Rachel H

The answer, of course, is “right now”. Whilst 90% LTV products have largely disappeared, a 90% deal can still be found from the handful of active lenders, although securing one generally requires significant patience and effort. Based on what we’ve seen so far, 90% deals tend not to hang around long and are likely to include a raft of restrictions. First-time buyers (FTBs) only, five-year fixed rates only, no new build, no furloughed income, max loan restrictions, max term restrictions, weekend applications only, and yes, a very early start to join the virtual queue for access to a limited daily tranche.

So why are lenders being so cautious? Why do products emerge briefly, before rapidly disappearing? And what might the future look like for smaller deposit lending? I’ll have a stab at answering these, though as I’ve written elsewhere recently, most current forecasts are about as useful as a chocolate teapot.

Full Service History

There are three main issues at play. The first, and perhaps the most visible barrier, remains service. As we’ve seen with Accord, Coventry, Platform and the handful of others who have re-entered the 90% market; doing so without being overwhelmed with demand is a difficult challenge and the primary reason lenders have restricted access to new deals.

We must remember that lenders too are working from home. Underwriters in kitchens, BDMs in garden sheds, call centre staff on sofas. Whilst the car is running, beneath the hood, the usually well-oiled, high performance engine has, in many cases, been replaced by hamsters in wheels, sticky tape, and a huge amount of effort and desire to do the very best to continue to support brokers and customers with their mortgage needs.

For any lender sticking their head above the 85% parapet, the barrage of 90% case fire that follows must be processed on top of their share of 1.8 million customers looking for a route out of mortgage payment deferrals, an overall upswell in demand for mortgage finance, a valuation backlog (though largely cleared now) alongside the significant challenge of running the bank from home.

On this front, I urge Intermediaries to be patient with lenders experiencing service issues, especially if dealing with a 90% case. Whilst the market is nearing full match fitness in terms of demand, lender service still has significant knocks from which to recover.

Stimulus Side Effects

Paradoxically, the next issue is a side effect of wider government support for the economy. Whilst helping millions avoid hardship throughout the COVID-19 crisis, government intervention has itself created material uncertainty around the underlying health of our economy, and indeed, the mortgage market itself.

The key question for lenders remains what will happen from October when support for employed and self-employed incomes is withdrawn and the facility for customers to defer mortgage payments has ended. How many of the 1.8m customers with mortgage payment holidays will be able to resume full payments? How many furloughed customers will still be fully employed? The answers to these questions will impact us all, but in the mortgage market, a more negative outcome will materially impact lender capital requirements and impairment costs, in turn restricting ability and appetite for new lending, particularly high LTV.

I must stress here that the economic data so far is encouraging. The majority of payment deferrals are being repaid, arrears across the industry remain low and the unemployment rate, whilst higher, is yet to reach anything near the levels seen in the last recession. However, the point remains that whilst uncertainty persists, lender appetite for 90% lending is likely to remain subdued.

House Price Uncertainty

Nobody wants to catch a falling knife. Closely linked to the above point around uncertainty in the jobs market is concern about the potential for house price deflation. Clearly, customers purchasing at 90% LTV are most vulnerable to negative HPI movement and lenders across the market have publicly, and rightly, stated a desire to protect borrowers from negative equity.

Again, whilst current data is encouraging, such concerns remain legitimate. Until we’ve seen the worst of the economic effects of COVID-19, house prices, particularly in London and the South East, may yet decline if a rise in joblessness restricts access to borrowing and reduces demand for property.

For those who do lend at 90%, I’d expect to continue to see restrictions on max terms and a limited supply of shorter fixed term mortgage deals until we see more certainty on the future trajectory of house prices.

90% Optimism

To conclude on a positive note, none of the obstacles I’ve highlighted here are insurmountable. The handful of active lenders in the 90% market already demonstrate this.

Assuming we continue to see positive data, I’d expect lender provision to slowly expand (albeit with many of the existing restrictions), thus in turn relieving the service concerns of being the only game in town. I’d expect to see more lenders consider Shared Ownership lending, especially with the upcoming restrictions to Help to Buy, and if economic concerns persist, more lenders considering mortgage indemnity insurance to underwrite high LTV lending to enable them to support more first-time buyers and purchasers. Expect more ‘family assist’ and ‘guarantor’ style mortgages too.

Failing that, and if a lack of high LTV mortgage finance itself begins to negatively impact house prices, it would not surprise me to see a renewal of the government backed Help to Buy Mortgage Guarantee scheme, aimed at providing lenders with support for high LTV lending and getting FTBs and low deposit borrowers moving again. For now at least, it’s time to stay tuned to lender updates, keep refreshing the sourcing systems, keep patience with slower than desired service, but above all, keep the faith that the market will normalise eventually with mortgages available to all customers who can afford them.

Alex Beavis

Head of Mortgage Products

These views are Alex’s own.

All information correct at time of publish.