For over a decade, the UK housing market has not tended to be a particularly happy hunting ground for wannabe first-time buyers, who have faced increasingly high hurdles in trying to get on the property ladder, not least in terms of saving for the higher deposits required, and more recently in meeting the higher affordability criteria needed to secure a mortgage, primarily due to soaring property prices, stagnant wage growth, higher interest rates, the cost of living. We could go on.
For many, the challenge of saving for a substantial deposit remains a formidable barrier to homeownership. High LTV mortgages of course, but particularly those 95% and, dare I say it, above present a real solution by obviously reducing the initial saving burden on buyers. However, we understand these products come with increased risk for lenders, necessitating a careful balance between accessibility and financial security.
High LTV mortgages however are absolutely essential for first-time buyers who often lack the financial resources to secure a larger deposit. And to say these buyers are critical to the housing market would be a huge understatement, given what they provide to the sector in terms of stimulating demand and contributing to market fluidity.
Yet, the risks associated with high LTV lending – even if they are relatively low – still persist, particularly the incidences of potentially higher default rates, and this poses a market challenge. Plus, stricter regulations and affordability assessments mandated by the FCA give another layer of complexity, particularly amidst ongoing economic uncertainties and inflationary pressures.
But, we need only look back over the last few years to see what a lack of lending and activity in the first-time buyer market can mean for the overall sector. IMLA's latest research highlights a cumulative shortfall of 3.1 million first-time buyers since the financial crisis, underscoring the persistent challenges in the market.
Despite strong affordability during the ultra-low interest rate years from 2013 to 2022, first-time buyer numbers failed to rebound to levels suggested by previous trends.
This period was one of only two in the past 40 years when mortgage repayments took up less than 30% of a first-time buyer’s income, the other being from 1993 to 2003. But, despite these favourable conditions, first-time buyer numbers averaged just 330,000 a year between 2013 and 2022, compared to 500,000 a year in the earlier period.
IMLA attribute this disparity to the wide-ranging regulation implemented after the financial crisis. These regulations included higher capital requirements on high LTV lending and the Financial Policy Committee (FPC) rule restricting lending at, or above, 4.5 times income to no more than 15% of lenders’ advances. As interest rates have risen, these regulatory pressures have compounded, with first-time buyer numbers dropping sharply from 405,000 in 2021 to 257,000 last year.
That figure, barely half of what was achieved in the 90s and early 2003s, should be a wake-up call to the mortgage industry, and indeed the new Government, who have pledged to focus on further first-time buyer support.
The newly elected Labour Government has pledged to support first-time buyers by addressing affordability and accessibility issues. Their plans include expanding Government-backed schemes, such as shared equity programs and new initiatives to increase housing supply and stabilise prices.
However, there will be no direct replacement for Help to Buy, for example, and stamp duty thresholds will return to previous levels for first-time buyers next year.
It is therefore to be hoped that mortgage lenders may be able to not only fill some of this reduced support, with specific products and schemes of their own, but they may be able to move the numbers of first-timers in a 90s/00s direction.
They may be expected to collaborate with the Government to create innovative mortgage products that are both accessible and financially sustainable. This partnership could involve developing incentives for lenders who offer high LTV mortgages or adjusting regulatory frameworks to facilitate lending.
One underutilised strategy that could significantly enhance lenders' ability to offer high LTV mortgages is the use of private mortgage insurance. This can play a crucial role in mitigating the risks associated with lending to first-time buyers by providing financial protection against default. It allows lenders to offer higher LTV ratios at more competitive rates, effectively lowering the entry barrier for prospective homeowners.
The benefits of using private mortgage insurance are multi-faceted. For lenders, insurance reduces the financial risk of high LTV lending, enabling them to expand their product offerings and reach a broader customer base. This risk mitigation can lead to more stable financial performance and increased confidence in offering competitive mortgage products. For advisers, this delivers a compelling value proposition to clients, providing them with access to mortgage products that might otherwise be unavailable.
For first-time buyers, it could be a real game-changer, making it possible to secure a mortgage without the need for a large deposit, maybe 5% only but potentially less. By facilitating access to high LTV products, insurance can help buyers enter the housing market sooner, potentially taking advantage of property appreciation and building equity more quickly.
The advantages for lenders in terms of risk mitigation and expanded market opportunities suggest that private mortgage insurance deserves greater consideration. Encouraging lenders to explore insurance options could result in a more resilient mortgage market, with benefits extending to lenders, advisers, and first-time buyers alike.
