First-time buyer product choice improves but rate increases mean mortgage costs go up

19 July 2018

• Number of products specifically for first-time buyers with either a 5% or 25% deposit continues to rise.
• Average rates increase as lenders price in likely increase in Bank Base Rate.
• Cost of monthly mortgage payments for first-time buyers rises again although the differential between those with smaller and larger deposits narrows.

A concerted political focus on increasing the number of first-time buyers has resulted in a relatively strong increase in the number of mortgage products catering for such purchases however the growing likelihood of an increase in Bank Base Rate (BBR) has resulted in an increase in costs for this borrower demographic.

The latest findings from the quarterly AmTrust Mortgage Loan to Value (LTV) Tracker show that average interest rates have increased quite significantly for those with either a 5% or 25% deposit, with the former seeing average rates up by 21 basis points and the latter by 12 basis points.

Recent suggestions from the Governor of the Bank of England, Mark Carney, are that the Bank of England’s Monetary Policy Committee (MPC) will vote to increase BBR at its meeting in August, and the AmTrust survey appears to show lenders have already priced in such a rise to their products.

Average fixed-rates for 95% LTV mortgages, according to Bank of England data, have increased throughout this year, up to 3.95%. Average rates for 75% LTV mortgages also increased to 1.74%. While the rate differential between 75% and 95% LTV loans has narrowed slightly to 2.1%, first-timers with only a 5% deposit can expect to pay close to two-thirds more each month and year for their loans.

This means first-time buyers with a 25% deposit will pay on average £20 more each compared to those with just a 5% deposit who will pay £22 more.

AmTrust’s research reveals that the average loan required by first-time buyers has gone up again since the last quarterly tracker in April – up to £125,397 for those with a 25% deposit, and £158,836 for those with a 5% deposit.

The AmTrust Mortgage LTV Tracker reviews the average monthly mortgage payments for first-time buyers on average loan levels, comparing loans for those with a 5% deposit to those with 25%, and looks at the product availability for first-timers.

Table 1: Average monthly repayments: 75% LTV mortgages and 95% LTV mortgages*

Source: AmTrust Mortgage & Credit, Money Saving Expert, UK Finance, Bank of England
Figures in brackets – Q1 2018 LTV Tracker results.
*Based on an average first-time buyer house price of £167,196 (UK Finance – April 2018)

Given the increase in average rates over the last quarter, AmTrust continues to believe that a BBR increase in August may not immediately feed into lender’s rates as they appear to have made a pre-emptive mood. However, it warns first-time buyers to anticipate a changed environment over the next few years as BBR reaches a ‘new normal’ with further increases likely over the next 12-18 months.

Product numbers continue to fluctuate

The Government’s continued focus on supporting the first-time buyer market has led to an increased interest in the sector, not just from mainstream lenders but also challenger banks and specialist operators.

This has led to the number of product options available to first-time buyers within the last quarter seeing a rise at both 75% and 95% LTV levels, and across both two-year and all product-type options.

The AmTrust LTV survey continues to review the number of actual product options available to first-time buyers with either a 5% or 25% deposit based on the price of an average first-time buyer house from UK Finance figures, the price of an average house as outlined by the June 2018 Halifax House Price Index, and the price of a house at the starting tier of stamp duty land tax, £300k. Below this amount first-time buyers do not need to pay any stamp duty.

In order to do this, AmTrust uses one of the online mortgage search engines which include deals available to both mortgage advisers and direct-only.

The latest research revealed there has been a significant increase in product numbers across both the 75% and 95% LTV options. 

Those lucky enough to be able to review 75% LTV options, have access to hundreds if not thousands of products – dependent on type and term – while the options for 5% deposit borrowers have also shown an increase although the choice is unlikely to stray into the hundreds if they want a two-year term.

Lenders continue to aim the vast majority of their first-time buyer product range at borrowers who are able to put down significant deposits on their property. Coupled with the greater costs for 5% deposit borrowers, AmTrust continues to be concerned that only those individuals who can access the Bank of Mum & Dad are able to get on the housing ladder.

It continues to urge lenders to look at options to increase their high LTV mortgage business, for example, by utilising private mortgage insurance to mitigate credit risk and act as a catalyst to drive rates down closer to ‘normal levels’ for lower LTV borrowers.

Table 2: Number of products currently available at 75% and 95% LTV at three different house price levels

Source: AmTrust Mortgage & Credit, Money Saving Expert, UK Finance, Bank of England, Halifax
Figures in brackets – product numbers Q1 2018 LTV Tracker results.

Pad Bamford, Business Development Director at AmTrust Mortgage & Credit, commented:

“This iteration of the AmTrust LTV Tracker is notable for two core reasons – firstly we are clearly seeing lenders getting in their ‘retaliation’ first when it comes to rate increases. The ‘mood music’ around the Bank of England’s MPC suggests that a rate rise is increasingly likely in August and mortgage lenders appear to be jumping before they are pushed.

“In a way this might be viewed as something of a positive as it should not mean a big glut of lenders jumping to raise rates once the announcement is made. However, this is only because rates have been upped over the past few months and there is a strong message to the market here that the days of ultra-low pricing is likely to be behind us.

“There are however clearly positives for first-time buyers – house prices are still high but they do not appear to be moving upwards with any vigour and indeed we’ve seen some falls in certain parts of the UK. With a far greater level of product availability for first-timers added into the mix, and the fact no stamp duty is payable on homes valued at £300k or less, then you could say that prospective new purchasers are in as strong a position as they have been for some time.

“But, and this has remained the case for a number of years, the major obstacle to overcome for most first-timers is still securing the deposit. Even at the 5% level, the average first-time buyer purchasing the average first-time home is still going to need in the region of £9k before they even consider whether such deals are affordable to them.

“Those who want to access the very best rates at the 25% deposit level, and save themselves over two-thirds each month on their mortgage payment, have an even greater challenge on their hands and would need to find over £40k. It is perhaps no wonder that we have real concerns around the ability of would-be homeowners to save this type of money; indeed without the help of family and friends it might seem like an impossible job.

“Clearly £9k is a lot of money but it is far more manageable than £40k, and we do not believe that the price differential between the two should be so high, or that those who can only save a 5% deposit should be having to pay such greater amounts in mortgage payments. This is why we urge lenders to look at other methods in order to increase their supply of products, and appetite to lend, in this market - one of which could be private mortgage insurance.

“Cutting down on the risk is one way to improve the appetite to lend, and while we approve of the increase in product options, this does not always translate into increased lending. The good news is that competition continues to grow, and lenders who might ordinarily not be looking at the first-time buyer market are now much more willing to. If more focus could be trained on high LTV lending then we would go a long way to ensuring far more first-time buyers have a fighting chance of getting on the ladder.”

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