Lenders attitudes to risk and operational capacity affect higher LTVs

Loan-to-value (LTV) has always played a huge role in the mortgage market, although borrowers can often be unaware of the activity swings going on behind the lending scenes and the reasons for these.

Getting back to basics for a moment, LTV is essentially the size of mortgage that a lender is prepared to offer borrowers in relation to the value of the property they are looking to purchase or remortgage. It is expressed as a percentage. For example, if a lender offers a mortgage deal which has a maximum 80% LTV, it means they will lend up to 80% of the property value. And the borrower will need a minimum 20% equity if they are remortgaging or a 20% deposit for a purchase.

The well-publicised reintroduction of physical valuations offered a huge lift to the mortgage market generally. This was swiftly followed by a flood of lenders welcoming new business. After a cautious initial approach, LTV levels initially crept up, but the question is – did some lenders open the higher LTV door a little too soon? Were they surprised by the amount of pent-up demand or were they not quite in the right position to make such moves from a logistical and operational sense?

Only individual lenders can answer this question, although many 90% and some 95% LTV products have been launched and pulled in quick fashion as lenders appear to be struggling to service the influx of enquiries. Or lenders are simply offering them for a limited time through limited distribution channels to help control the supply and demand element.

Highlighting products being pulled from the market is certainly no criticism of these lenders. If service levels can’t be maintained, then this is clearly a sensible move to make. Managing risk and operational capacity has always been a challenge for lenders, and this is proving increasingly difficult in the midst of some uncertain economic conditions. This is reflected in product numbers. Recent data from Moneyfacts revealed that the number of products at 90% loan to value has shrunk to less than a tenth of the figure available pre-lockdown. The data outlined that there were 779 residential deals for borrowers with a 10 per cent deposit in March before social distancing rules came into force, shutting down the market. However, at the end of June, there were said to be just 72 products on offer at 90 per cent LTV, a drop of 91 per cent.

The higher LTV lending battle will be an ongoing theme throughout the rest of 2020, and this will be dictated by a number of issues from an internal and external perspective. There’s no getting away from the fact that borrowers are crying out for higher LTVs. However, there remain question marks over house prices, unemployment figures, not to mention if and when a recession may hit – and how long this may last. From a lending perspective, issues remain over attitudes to risk, operational capacity and servicing the valuation backlog and pipeline cases.

We also have to consider how this period is affecting new and existing borrowers. At Impact Specialist Finance, we’re seeing greater numbers of clients coming through our doors with some form of adverse credit, and this number is only likely to grow. When it comes to servicing these needs, fewer options are currently available. Many specialist lenders are tightening criteria and it’s difficult to know if, and when, the near prime product market will experience any significant improvement. Especially in the midst of lingering uncertainty around exactly how payment holidays will affect credit assessments.

These trends will prove interesting stories to follow as lenders continue to get to grips with demand and how best to service ever-changing borrowing circumstances amidst a variety of Covid-19 and wider economic repercussions. What we do know is that mortgage advisers will prove invaluable in quickly determining whether a case is viable or not and advice has never been more vital than it is today.

Looking at purchasing your first property?

Looking at purchasing your first property?  Then this week’s column should be of interest as there’s a number of ways to help you get on to the property ladder that may not be widely known.

First Time Buyers will usually require a minimum 5% deposit, but product availability increases with a 10%+ deposit.  Some lenders will allow a 5% builders deposit, but this must be confirmed as a gift and non-repayable. Some lenders will allow the deposit to come as a gift from the Bank of Mum and Dad, or an immediate family member.  This can include step family, aunts and uncles and is acceptable for first time and subsequent buyers.  The money must be a transparent gift that has originated in the EU and can be easily traced back to the originating source.   A letter from the family member will usually be required and needs to advise the gift amount, relationship the person gifting the monies is to the applicant, confirmation that it is a gift and not a loan and therefore is not repayable, confirmation that they do not currently own the property being sold and that they will not live in the property or have any interest in the property post completion. 

Some lenders may allow a loan of up to 100% of the property value if parents or another immediate family member will act as guarantor or provide additional security. Those guaranteeing, in the main, will need to show evidence of affordability for both their current residential mortgage and the one they are intending to guarantor and possibly allow a charge to be taken on their own home.

All positive indeed and that’s not even touching on the number of Help to Buy, Right to Buy and Shared Ownership schemes available.

Rates have reduced lately in a bid to assist this underserved market segment and criteria is definitely more accommodating.  Income multiples tend to be between 3.75 to 4.5 x joint income and terms and conditions always apply!  However, Lenders are showing a willingness to assist First Time Buyers and in the current market, that can only be a good thing.