Each month I like to ‘run the numbers’ in terms of the high LTV mortgage market, particularly in terms of average house prices, average deposit levels, and what products and rates an ‘average’ first-time buyer might be able to access.
Of course, from the outset, I’m well aware that there tends to be no such thing as ‘average’ in the mortgage market and that, for instance, when looking at the ‘best buys’ they tell me very little about who might actually be able to access these rates because every single borrower is different, so are their wants and needs, and so are how they are viewed by lenders.
However, such an exercise is (to my mind) always informative, especially if it plays against some of the media headlines that catch my eye. Reality often tells a very different tale.
For instance, I’ve seen a lot made of the Halifax – at one point and this might have changed now – offering five and 10-year fixes for 60% LTV borrowers apparently at lower rates than those wanting a two-year deal.
That product ‘moment in time’ seems to have sparked a considerable debate around whether the market has really pivoted and shifted to a point where it’s cheaper to get a longer-term deal rather than a shorter one. Now, again at a ‘moment in time’ with Halifax, that might well have been the case, but would that suggest a wider thematic shift for the entire market? I had my doubts.
Let’s first start with the point that lenders are not stupid. They clearly recognise the rate environment we are currently in; after all, it informs every move they make in terms of the product/rate offering.
Obviously, Bank Base Rate has gone up, as have swap rates. Deposit-taking institutions might not be so tied to both these facts, but others are, and their actions shape the market and the responses of competitors. They know that borrowers are seeing ‘rate increases’ at the same time they are seeing the cost of living increase, particularly impacting areas such as energy costs but many others as well.
With that being the case, it’s understandable why they might conclude, and have already seen, a much greater demand for longer-term fixes from advisers and their clients, as the former seeks to give mortgage payment stability and certainty over the longer term to the latter.
Add that all together and what would your strategy be going forward? To make your five-year fixes cheaper than your two-year deals? Or inch both up? Or make a splash by momentarily having your five-year deals at lower LTVs, cheaper than your two-year rates, while for other borrowers you actually offered more five-year deals and also inched those rates up?
Let’s look at the higher LTV market as a current example. Taking the Nationwide BS average house price of just over £265k as our benchmark, I ran the product numbers to see what you might have access to as a first-time buyer with a 5% deposit.
For a start, it’s good news. Total number of products has gone up again month-on-month to 245 from 230 in March. The number of two-year fixes increased from 88 to 94, however five-year fixes have gone up from 83 too 99. You might already get a sense of where this is heading…
The cheapest two-year fix at 95% LTV is 2.36% – last month it was 2.37% – while the cheapest five-year fix is 2.66%, whereas last month it was 2.5%. In other words, lenders don’t look to be following the five-year cheaper than two-year ‘trend’ at all – in fact, it’s not a trend.
Lenders are doing exactly what you would expect – they are seeing growing demand for longer-term fixes and they are bringing more to market and pricing them up, especially in an environment where ‘rates are rising’. Two-year fixes are pretty steady in comparison and this tells you exactly where the market is heading, given the current situation and what borrowers clearly want to achieve in light of a short-term future which will have high inflation.
So, while the media ‘mood music’ might have shown five-year deals being cheaper than two-year, the reality looks pretty much as you would expect it to be. With five-year products you pay for the longer certainty with a higher rate, and while there might be certain anomalies available at any given time, this remains true right now, especially if you’re a borrower with a low deposit.
The good news is that a five-year fix below 3% is available for 5% deposit borrowers, when 12 months ago, could any of us believe we would be able to say this? High LTV product choice continues to grow, almost touching the 250-mark when at the start of 2021 we barely had a product to choose from. First-time buyers can get onto the ladder with a 5% deposit, and although house prices have increased substantially, this should make it easier to make the dream a reality for more borrowers.
Now, if only we could sort out the supply ‘issue’ in the UK property market – then we might have a very different reality to deal with.
Patrick Bamford is head of international business development at Qualis Credit Risk, part of AmTrust International