95% LTV mortgages showing little take-up

ended 26. August 2021

Data from online mortgage broker, Trussle, shows that only 1% of its mortgage completions were from 95% mortgages in July 2021, despite 49 lenders offering them.

We asked the Newspage community of brokers why. Their responses are below.

12 responses from the Newspage community

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"We can echo the data published by Trussle. We had precisely zero completions at 95% LTV in July, and only one completion at 90% LTV. A quick look at the rate options tells a good story; the lowest 2-year fixed if you have a 5% deposit is 2.95% with Coventry Building Society whereas if you have a 10% deposit, you may be able to qualify for a 1.99% deal with HSBC."
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95% mortgages are regarded by many as a gimmick. The interest rates are often considerably higher than a 90% mortgage so many clients save more, borrow from family or wait for a cheaper property instead of taking the 95% deals. The property price inflation caused by the Stamp Duty deadline ending worried many borrowers. A 95% mortgage in times of property price boom can often lead to an adjustment of property values after the boom and the fear of negative equity meant that many borrowers chose not to take a 95% mortgage.
"Despite the increase in 95% LTV mortgages, lender criteria and credit scores remain very tight at this level, meaning many borrowers make an approach to a lender to find out that they simply do not qualify."
"95% mortgages caused a flurry of interest, especially with first-time buyers, but what many weren't told is the criteria they need to meet to get one, with many lenders reserving these loans for people with better credit ratings."
"The 5% deposit enquiries just don't come up as much as they used to which is weird because they are easier to obtain than at any time in the last 18 months. There are 2 possible reasons: Without foreign holidays and other easy ways to splash the cash, most of those first-time buyers who used to only have 5% are now in the position to get the better rates on offer with a 10% deposit having built up their savings over the pandemic. Perception is everything and I think a lot of consumers still think 5% deposit mortgages aren't easy to come by so aren't bothering. We certainly have a job to do to educate the public that this isn't the case!"
The main issues with 95% mortgages have been two fold; high rates which make them expensive for the borrower and potentially impact on their affordability within the lenders calculations and very tight credit scores, meaning only the very best applications make it through to receive an offer. Both of these drivers mean many first-time buyers have chosen to save a little more, or get assistance from family, to move forward with a 10% deposit - getting markedly better interest rates and an easier ride from the lenders credit score. The final issue that may be skewing the statistics is Help-To-Buy. Whilst the overall result is the borrower only needs a 5% deposit, the lenders mortgage is a 75% product, with the balancing 20% coming from the Help-To-Buy equity loan. This could mean that all these transactions are reported as 75% mortgages, as opposed to 95% mortgages - which is statistically correct, but hides the amount of buyers putting down only 5% of their own funds.
"The take-up of five per cent mortgages has been pretty slow and many of the biggest lenders have hardly provided any of these deals. First-time buyers want low deposit mortgages but they are not willing to be locked into an expensive five-year fix on full capital repayment. Borrowers also need to be squeaky clean to qualify. There are more two-year fixes available now if you have a smaller deposit and the rates are getting cheaper all the time."
"The major problem for most 5% deposit mortgages is the rates and products being offered by lenders are simply not competitive, and the credit scoring and profile of the client is also super strict, which is leaving many borrowers worried that if they don't have the credit score of a saint they are not eligible, which is not actually the case. Other borrowers now have more savings due to the lockdown and have added those pounds towards their deposit, giving them a much wider choice of lenders and products, which is a win win for the borrow."
A combination of property price inflation and high interest rates have resulted in a lack of take up of 95% mortgages. Many first time buyers are waiting for prices to cool off and if possible, save for a 10% deposit where interest rates are over 1% cheaper. Lenders also restrict the loan to 4.5x which can prove very difficult for those buying more expensive properties in London and South East.
95% mortgages come with strings attached - affordability (the amount an applicant can borrow) is reduced at this loan to value. Furthermore lenders can impose restrictions on the property type - such as flats which can make these loans a non starter for some first time buyers.
Trussle is not the destination for First Time Buyer advice, Trussle target market seems to be Remortgages which will skew its data. Mortgage Advisers working out of New Build Showhomes will have a different story to tell. Where 95% LTV and specifically Help-to-Buy is king.
"Buyer hesitancy could go some way to explaining the slow burn of high LTVs; buyers are being careful - especially those purchasing a first home - now that the stamp duty deadline has been and gone, and the high rates associated with these products may be off-putting. "It's possible that people are also wary of higher interest rates and lending charges, plus the fact that even with a glowing credit score, they may not be able to borrow as much as they'd like with these deals." "Longer term risks include getting into negative equity and difficulty remortgaging . It's vital that any borrower seeks advice to ensure they have the best deal for their particular circumstances."