What does the chart show?
It illustrates the growing proportion of UK mortgage lending at loan to value (LTV) ratios of 90 per cent or higher. Figures from the Bank of England last week found this type of lending had reached its highest level as a share of the total since the financial crisis, topping 18.7 per cent of all lending in the first three months of 2019.
The data appeared in a July report published by the BoE’s Financial Policy Committee, which monitors potential risks to the financial system. It is based on product sales data from the Financial Conduct Authority and the central bank’s own calculations.
What’s behind this growth trend?
Competition in the mortgage market has been steadily heating up, with lenders battling for business by offering low interest rates on fixed-rate mortgages, sweetening deals with fee discounts or waivers.
First-time buyers are particularly active in the market and their mortgages are often at the higher end of the LTV spectrum. Lenders traditionally demanded bigger compensation on these mortgages by charging higher interest rates. In the past five years, though, the average rate on a two-year fixed rate mortgage for a 95 per cent LTV loan has dropped from 5.35 per cent to 3.25 per cent. Similarly, rates on five-year fixes have fallen from 5.58 per cent to 3.64 per cent over the same period, according to figures from finance website Moneyfacts.
The number of fixed-rate deals on offer to those with a deposit of just 5 per cent has risen from 149 in July 2014 to 336 this month, Moneyfacts said, another illustration of the intensifying battle for customers.
Should I be worried about this increased risk?
You may be, but the Bank of England is sanguine in its analysis. It says the share of households with a mortgage service ratio (a ratio measuring mortgage debt as a percentage of income) above 40 per cent remains low, at 1-1.4 per cent over the past 18 months. Anything above that 40 per cent level and borrowers are much more likely to run into difficulties with their monthly repayments.
The BoE added that the wave of attractive deals on offer from lenders had not resulted in a flood of new demand from borrowers. Mortgage debt rose by 3.2 per cent in the year to May, which it said was “broadly in line with household incomes and significantly below the growth rates seen in the decade prior to the crisis.” People have also been taking out longer-term loans, which boosts their ability to make smaller repayments.
So, nothing to see here?
Not entirely. The FPC’s role is to look out for potential disruption or instability in the financial system and it has suggested Brexit may be a factor that could lead to a resurgence in the demand for cheap mortgages. At the moment, uncertainty over the political outlook is leading many people to put off moving or buying. But if more clarity emerges over the UK’s departure from the EU, the Bank says that “borrower demand could rebound significantly, and by more than economic growth.”
What about interest rates?
The Bank’s tempered outlook for UK growth has led markets to conclude that a rate rise is unlikely in the short term. As a result, the swap rates that guide lenders’ pricing of their loans have been moving down recently.
Mark Harris, chief executive of mortgage broker SPF Private Clients, says: “The cost of funds has fallen, meaning lenders could, if they wanted, reduce rates even further. While a race to the bottom is not what lenders want, they would rather hit targets than sit on a pile of cash, so we could see even cheaper mortgage rates.”
