Assessing the Risk of High LTV Mortgages in the UK Market

Table of Contents

• DATAMONITOR VIEW
  • CATALYST
  • SUMMARY
• ANALYSIS
  • High LTV mortgages have become popular as house prices have grown
    • Datamonitor defines high LTV mortgages as mortgage products with a 90% LTV or above
      • Some specialist mortgages above 85% LTV, however, can also be considered high LTV mortgages
    • First-time buyers and others have been priced out as house prices have risen
    • To cater for customers and remain competitive, lenders began to offer higher LTV mortgages
    • In turn, buyers have been taking up high LTV mortgages
  • There is concern surrounding high LTV mortgages because of the risks they pose
    • High LTV mortgages expose borrowers to a greater extent than traditional mortgages
    • Higher exposure is particularly troubling as the economic climate is becoming more difficult
      • House price growth is now slowing, though 2007 looks still to be a strong year for most regions in the UK
      • Interest rates have risen since the second half of 2006 and caused mortgage rates to rise
      • Arrears and repossessions continue to rise but remain low
      • Unsecured bad debt continues to rise
      • Most importantly, the economic climate looks more uncertain given recent events in the financial world
    • It is not in lenders' interests for borrowers to be unable to afford their mortgages
  • The risk for most lenders nevertheless remains low
    • High LTV mortgages remain a very small proportion of the overall mainstream market
      • Major lenders are not particularly exposed to high LTV lending
      • Recent mortgage lending, however, poses more risk
      • Even for mortgages with LTVs of around 80-90% there is still some risk
    • For some specialist sectors, however, high LTV mortgages could be more of a problem
      • Self-certification mortgages are now available at higher LTVs but some customers overstate their incomes
      • While buy-to-let LTVs remain largely under 85%, rental income is not the only factor to affect affordability
      • Lenders operating in the sub-prime prime sector are at greatest risk
    • But lenders are recognizing the risks since the credit crunch and making lending criteria more stringent
      • Mainstream lenders have lowered LTVs and raised prices
      • Lending criteria and products have been cut back particularly in the sub-prime mortgage market
  • Still, lenders should be prepared should a number of scenarios occur
    • A number of scenarios could affect both mortgagors and lenders with high LTV mortgages
      • A significant rise in interest rates would see an increased number of borrowers in payment difficulties
      • A house price crash would throw a significant number of borrowers into negative equity
      • Should an economic downturn occur, borrowers' savings would not cover payments for long
    • Lenders should take the right precautions to avoid danger in the future
• APPENDIX
  • Supplementary data
  • Definitions
    • Bank of England base rate
    • Buy-to-let mortgage
    • LTV
    • Self-certification mortgage
    • Sub-prime
    • Variable mortgage
  • Methodology
  • Further reading
  • Ask the analyst
  • Datamonitor consulting
  • Disclaimer
  • List of Tables
    • Table 1: LTV at origination of all loans for house purchase in the UK, Q2 2005-Q4 2006 (%)
    • Table 2: Change and percentage change in the number of products available in the UK mortgage market, July-September 2007
    • Table 3: UK properties in arrears and taken into possession, H1 1995-H1 2007 (units)
  • List of Figures
    • Figure 1: Arrears and repossessions are on the increase in the UK, H1 1994-H1 2007