Everything is not yet back to normal
Hiten Ganatra, is managing director of Visionary Finance
Rarely does a day pass when another lender announces their relaunch into 95% lending and those not operating in the market on a day-to-day basis may be forgiven in thinking that almost everything is back to normal in terms of availability of mortgages for those with 5% deposits.
We know that this isn’t the case though…..
Before we look at why this may be and what could be done about it, let’s take a moment to look at the mechanics of the government scheme as although very few lenders have actually used the scheme, it has undoubtedly started us down this road:
•The government provides lenders with the option to purchase a guarantee on the top- slice of the mortgage.
In other words, the government will compensate the mortgage lender for a portion of the net losses suffered in the event of repossession. The guarantee will apply down to 80% of the purchase value.
Lenders will also take a 5% share of net losses above this 80% threshold. This will help to ensure that lenders are not incentivised to originate poor quality loans.
The guarantee will be valid for up to seven years after the mortgage is originated, as government evidence showed them that loans are unlikely to default after such a period has elapsed.
Furthermore, a mortgage taken out on a repayment basis would normally have paid down sufficient capital after this time so that the borrower’s equity stake would be close to or greater than 20%, meaning that the guarantee would effectively no longer offer any protection.
Lenders will need to pay the government a commercial fee for each mortgage in the scheme. This fee will be set so that the scheme is self-financing
The last point is a fundamental one and may explain why so few lenders have used the scheme so far, as the fee for each loan is, I believe, circa 90bps.
Whether a lender has used the scheme or not to launch into 95% lending, the unfortunate fact is that the rates are significantly higher than those at 90% LTV which will mean that many potential borrowers will struggle to fit existing affordability calculations – despite the cost of the mortgage still being cheaper than the rent that many are paying.
We are also seeing restrictions for the self-employed and lenders not allowing 95% LTVs on new build properties, thus restricting the availability further.
What could change this? Let’s go back to the government scheme that started this all off, as I feel a rethink is needed first of all on the fee charged to offset losses, as surely a form of indemnity insurance (remember MIG?) should be used instead or given as an option for lenders when they seek to participate in the scheme.
This may also help lenders with their own self-funded 95% products too and enable them to offer them to more types of borrowers and properties.
At present, I am reminded of an old saying ‘sprat to catch a mackerel’, as it feels like lenders are offering rates at 95% but exposing themselves to minimal risk in the hope of a larger or more significant gain (brand exposure, perception of a wider product breadth to get more cases at lower LTVs etc.).
However, I do not blame the lenders for doing this, but to say that 95% lending is back is a misnomer and it is only really back for a select few customers.
It’s definitely a start though, so let’s see if we can seek to offer 95% to a wider proportion of the population with a little more help from Boris and his team of policy makers.