High-risk borrowing is at its highest level since the 2008 financial crisis, according to the Bank of England. But as first-time buyers benefit from record low fixed rates, there is a danger that some are overreaching themselves. Article by Nick Green.
High loan-to-value (LTV) mortgage lending is at its highest for 11 years, with growing numbers of buyers being granted loans despite having a low deposit or little equity. In the second quarter of 2019, high LTV mortgages – defined as any mortgage where the loan accounts for 75 per cent or more of the property price – made up nearly 40 per cent of all mortgages granted, the highest peak since 2008. The number of very high LTV mortgages (90 per cent or over) saw a similar 11-year peak, accounting for 5.5 per cent of all mortgage deals arranged in that quarter.
Also up is high loan-to-income (LTI) mortgage lending, at 46.1 per cent – nearly a percentage point higher than the same time last year. A high LTI mortgage is one where the sum borrowed is 4.5 times the borrower’s income, or above.
Industry alert to mortgage early warning signs
Both high LTV and LTI mortgages were widespread prior to the financial crisis, and were contributing factors to it. Elsewhere, however, the Bank’s figures are more encouraging, showing that fewer people are in mortgage arrears. The proportion of mortgages in arrears is now at its lowest on record (measurement began in 2007) and stands at 0.97 per cent. Despite this, the property industry is starting to voice concerns that borrowers are taking on too much risk.
Mark Pilling of estate agency Spicerhaart suggested that the warning signs should not be dismissed. ‘It is obviously great news that arrears are low and still falling, but that does not necessarily mean that people are not experiencing financial difficulties. [A] more worrying trend that we can see from these stats is that the number of mortgages with higher LTVs is continuing to increase. This suggests that some borrowers may be stretching themselves too thin, and if rates do rise, they may start to struggle with their repayments.’
Simon Checkley, managing director of Private Finance, had a more positive take. He said, ‘While high LTV products do come with a slight premium, in today’s low rate market they’re incredibly affordable.’ He did acknowledge that it was always preferable to aim for the lowest possible LTV ratio, in order to secure the best interest rate and minimise the total sum repaid, but pointed out, ‘It’s not always realistic to save a hefty deposit.’
This observation was underpinned by more figures from the Bank, which showed that fixed rate mortgage deals are also at their most popular since records began in 2007. Over 92 per cent of all mortgages complete in the quarter were fixed rate deals, as homebuyers and remortgagers take advantage of record low base rates. The question remains, however, what will happen to these borrowers’ repayments when the deals expire and rates finally rise again. A lot will depend on how much of a safety margin they have built into their borrowing.
The number of mortgages obtain for moving house matched the number of remortgage deals for the first time in nearly a year. Remortgaging has proved significantly more popular for the previous two quarters, but there are signs that the housing market is loosening up again.
Some buyers opt for interest-only deals
Meanwhile, date from the criteria search firm Knowledge Bank shows that interest-only mortgages are still attracting some customers, despite a 13 per cent drop in their use in 2018. As the name suggests, repayments made on an interest-only mortgage only pay off the interest, so the loan itself is not repaid (but nevertheless must be repaid by the end of the mortgage term). Interest-only mortgages are commonly used for buy-to-let, as the loan can usually be repaid by the eventual sale of the property. However they can also be used for residential property. Knowledge Bank reports 1.7 million interest-only mortgages in the UK, and that they are among the top five most searched-for mortgage criteria.
A person buying their home via an interest-only mortgage would have to find a way to pay off the whole loan at the end of the mortgage term – either by remortgaging, using other savings, or selling the home. Interest-only mortgages are usually only recommended for homebuyers where the buyer can be reasonably certain of being able to switch to a repayment mortgage in the near future (due to improved income or by inheriting a lump sum).