Is the 95% LTV mortgage set to disappear? Brokers give their verdict

by | Oct 4, 2022

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With all the question marks surrounding the economy, rates set to rise further (potentially sharply) and some predicting a property market crash, one  broker has suggested we may see the “death of the 95% LTV mortgage while this uncertainty continues”. 

Mike Staton, director of Mansfield-based Staton Mortgages: “The risk of homeowners ending up in negative equity right now is a high one, and it’s an uncertainty that may lenders just won’t be willing to gamble on. The easiest way to avoid this risk is the removal of the 95% loan-to-value mortgage. Having talked with several BDMs from different building societies over the past week or so, they think the withdrawal of 95% products is next. This happened during the pandemic so this is not as ground-breaking as we think. If Stephen King were to write a horror story about the mortgage market, the events would unfold in 2022 and 2023 and the victims would be first-time buyers.”

Ricky Dosanjh, managing director of Chatham-based mortgage broker, Reeds Financial: “It will be a huge shame and blow if 95% mortgages disappear from the market as there are borrowers who can afford and need them. But much like at the height of the pandemic, we are likely to see a growing number of lenders shun them, at least in the short term. 95% loan-to-value borrowers are predominantly first-time buyers, who are crucial to the correct functioning of the property market. They generally buy entry level homes, which enables other property owners to upsize. If first-time buyers can’t get mortgages, you get a ripple effect all the way up to the top of the property market.”

Gaurav Shukla, mortgage adviser at London-based broker, Home Me“95% loan-to-value products are currently still available but once property prices start to come down, we may well see fewer products on the market, similar to when lenders removed all 95% loan-to-value products when Covid hit. They did this in anticipation that the property market would crash, which it didn’t. In fact, it went supersonic due to the stamp duty holiday and the race for space. It’s highly unlikely 95% LTV mortgages will completely disappear but there are likely to be fewer lenders in that space. Lenders may also just offer 95% products on a 5-year deal only to safeguard themselves against any drop in house prices during this time.”

Amit Patel, adviser at Welling-based mortgage broker, Trinity Finance: “The removal of 95% loan-to-value mortgages would be a catastrophe as it would effectively put first-time buyers out of reach of being a homeowner overnight. It’s important to remember that not all buyers have the luxury of having a family member who can help financially towards their deposit. Lenders will most likely increase their rates to mitigate the risk on their 95% loan-to-value mortgages if the property market starts to dip. 5% deposit mortgages will still exist but be more expensive.”

Graham Cox, founder of the Bristol-based broker, SelfEmployedMortgageHub.com: “Without some sort of government intervention, I think it’s a nailed-on certainty that lenders will withdraw their 95% LTV mortgage products, for fear of borrowers falling into negative equity. No doubt Truss and Kwarteng will provide another backstop, though, for their bank and housebuilder friends.”

Mark Dyason, founder of the mortgage broker Edinburgh Mortgage Advice: “95% loan-to-value mortgages are vital for first-time buyers. The main issue for lenders is the risk and capital required to fund 95% loans. Don’t be surprised if we see the launch of a new Mortgage Support Scheme from the government to aid this sector and keep the oxygen flowing into the whole housing market.”

Ian Hewett, founder of Ashford-based The Bearded Mortgage Broker: “The 95% loan-to-value mortgage won’t die, but there will almost certainly be fewer of them due to the current economic situation. Equally, I am sure they will be resurrected once stability is back and confidence in the government has resumed. As a broker who tends to advise a lot of first-time buyers, most of mine have 10% deposits saved or are even more fortunate and have gifted deposits, so the reduction in 95% loan-to-value products may affect a smaller market share than many think.”

Craig Fish, Managing Director at mortgage broker Lodestone: “Unfortunately, a significant reduction in the number of 95% mortgage products available is likely to be something that we see happen in the coming months, though at present there are still many products available with rates starting from 4.6%, although the majority are priced north of 5.5% for 5-year fixed rates. I don’t believe that these products will be withdrawn from the market completely, but I do expect to see the rates on 5% deposit loans increase quite significantly to offset the risk involved, just in case there is a reduction in property values. That said, we aren’t necessarily expecting the housing market to crash, more likely that it will stagnate for a while until the economy and inflation settle circa 2024. It will be a real shame if these products are withdrawn, though, as they are most commonly used by first-time buyers, and first-time buyers are the life blood of the property market.”

Mark Robinson, Managing Director of Southampton-based Albion Forest Mortgages“95% loan-to-value mortgages pose the largest risk to lenders and the simplest way to combat that risk is to remove them full stop. This is doubly true of new build properties, and we may see some of those products go first. Right now, there is a lot of concern as to the future trajectory of house prices and lenders may hedge their bets by pulling or reducing the number of their riskiest loans.”

Rhys Schofield, managing director at Derbyshire-based mortgage advisors Peak Money“A house price crash is pie in the sky stuff. It sells papers but I think it’s out of touch with reality. Firstly, we still have an issue around supply and demand, which creates an inflationary pressure until, by some miracle, enough houses are built. Secondly, and the bit that always gets missed, if buyers don’t buy then what’s the alternative? Renting? Stock shortages in the rental market are even more acute, rents are insane and landlords are either putting up their rents or leaving the market. This only drives up the price of the alternative, further. I do think we will see a squeeze on the middle of the market where bigger mortgages become unaffordable and people sell up to buy something smaller but then that creates a price pressure on cheaper properties. There won’t be a crash, and 95% mortgages will still be available even if it takes some government input. The UK is still a nation of people who aspire to homeownership.”

Lewis Shaw, founder of Mansfield-based Shaw Financial Services: “It’s true that, whenever we see volatility in the economy and with interest rates, in particular, lenders question the viability of 95% loans. When you add into the mix some prominent investment bank analysts’ and economists’ predictions of a fall in house prices between 10%-15%, the problem becomes even more apparent. Due to soaring mortgage rates hammering mortgage affordability for thousands of households, if people can’t afford to borrow as much or need to sell up as their mortgage becomes unaffordable, it will apply downward pressure on prices. With that in mind, you can understand why some lenders who had withdrawn from lending to reprice have returned to the market without 95% LTV products.

“If we do see, as predicted, a house price slump of 10% over the next 18-24 months, anyone with a 95% mortgage would instantly find themselves in negative equity, a concept many haven’t heard about in a generation. One central tenet for mortgage providers is that they must lend responsibly. It’s pretty obvious if they have reasonable grounds and evidence to believe we’ll see prices fall, that it would be irresponsible to put a buyer in a position where the mortgage loan is greater than the asset it’s secured against and all the problems that can bring. Does that mean we’ll see fewer 95% products on the market? Almost certainly. In turn, this will impact house prices as fewer first-time buyers will be able to make an application due to higher deposit requirements, so house price decreases could be a self-fulfilling prophecy predicated on a lack of available mortgage credit. Welcome back to 2008.”

Jonathan Burridge, founding adviser at hybrid mortgage adviser, We Are Money: “It’s a real possibility that banks will start to retreat from 95% LTV loans due to concerns about property prices deflating. Property prices do fall, just look at the early 90’s and also when the credit crunch hit in 2007 and 2008. Even though there may be demand today, if interest rates make mortgages unaffordable it will deter those thinking of moving and first-time buyers. If interest rates rise too far too fast, the result will be an increase in borrowers who can’t afford to pay their mortgages, which will lead to forced sales. You then start to see supply outstripping demand and the result is downward pressure on prices. I am not saying this is a nailed-on certainty, but if we see 95% rates being pulled at scale we should all pay close attention.”

Anil Mistry, director at Leicester-based RNR Mortgage Solutions: “The lack of 95% loan-to-value products will only be a temporary measure, much like when the first lockdown happened. Once lenders get more confident with what is happening to the housing market and house prices, they will come back. Otherwise, you are taking a big section of the first-time buyer out of the market.”

Robert Payne, director of Bristol-based Langley House Mortgages“The property market is known for its resilience but right now there is a very good chance we could see house prices drop, given how quickly and how dramatically things have changed in recent weeks. If prices do drop, the first owners to be impacted will be those that borrowed with a 5% deposit and they run a real risk of slipping into negative equity, causing high risk for lenders. It would be reasonable to assume that we will see 95% deals disappear from the market as lenders protect themselves in adverse conditions and wait for market adjustments to take place. The unknown variable is whether there will be any government support.”

Imran Hussain, director at Nottingham-based Harmony Financial Services“It would be a major blow for first-time buyers if 5% deposit products did become scarce, but with the average deposit in the UK being 15% of the purchase price, it may not affect as many people as you think. Due to the volatile nature of the market and economy right now, many lenders may decide to remove or hold off from launching any new 5% deposit products until some form of normality returns.”

Samuel Mather-Holgate of Swindon-based advisory firm, Mather & Murray Financial: “I don’t think the 95% mortgage will become extinct, just endangered. The prediction of a housing market crash is a lonely one, with most economists expecting the market to seize up rather than implode. With transaction levels so low, banks will only want to accept the very best applicants, so I expect credit ratings and affordability will both have to be exemplary to get a mortgage with just a 5% deposit.”

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