Death of the 95% LTV mortgage?

It will be a shame to lose 95% mortgages from the market as there are borrowers who can afford and need them, but much like at the height of the pandemic, we are likely to see a growing number of lenders shun them, at least in the short term. 95% loan-to-value borrowers are predominantly first-time buyers, who are crucial to the correct functioning of the property market. They generally buy entry level homes, which enables other property owners to upsize. If first-time buyers can't get mortgages, you get a ripple effect all the way up to the top of the property market.

95% loan-to-value products are currently still available but once property prices start to come down, we may well see fewer products available, similar to when lenders removed all 95% loan-to-value products when Covid hit. They did this in the anticipation that the property market would crash, which it didn’t. In fact, it went supersonic due to the stamp duty holiday and the race for space. It's highly unlikely 95% LTV mortgages will completely disappear but there are likely to be fewer lenders in that space. They may also just offer 95% products on a 5-year deal only to safeguard themselves against any drop in house prices during this time.

95% loan-to-value mortgages are vital for first-time buyers. The main issue for lenders is the risk and capital required to fund 95% loans. Don't be surprised if we see the launch of a new Mortgage Support Scheme from the government to aid this sector and keep the oxygen flowing into the whole housing market.

Without some sort of government intervention, I think it's a nailed-on certainty that lenders will withdraw their 95% LTV mortgage products, for fear of borrowers falling into negative equity. No doubt Truss and Kwarteng will provide another backstop, though, for their bank and housebuilder friends.

A crash is pie in the sky stuff. It sells papers but I think it's out of touch with reality. Firstly, we still have an issue around supply and demand, which creates an inflationary pressure until, by some miracle, enough houses are built. Secondly, and the bit that always gets missed by pundits, if buyers don't buy then what's the alternative? Renting? Stock shortages in the rental market are even more acute, rents are insane and landlords are either putting up their rents or leaving the market. This only drives up the price of the alternative, further. I do think we will see a squeeze on the middle of the market where bigger mortgages become unaffordable and people sell up to buy something smaller but then that creates a price pressure on cheaper properties. There won't be a crash, 95% mortgages will be available even if it takes some government input, and the UK is still a nation of people who aspire to homeownership.

It's a real possibility that banks will start to retreat from 95% LTV loans due to concerns about property prices deflating. Property prices do fall, just look at the early 90's and also when the credit crunch hit in 2007 and 2008. Even though there may be demand today, if interest rates make mortgages unaffordable it will deter those thinking of moving and first-time buyers. If interest rates rise too far too fast, the result will be an increase in borrowers who can't afford to pay their mortgages, which will lead to forced sales. You then start to see supply outstripping demand and the result is downward pressure on prices. I am not saying this is a nailed-on certainty, but if we see 95% rates being pulled at scale we should all pay close attention.

95% loan-to-value mortgages pose the largest risk to lenders and the simplest way to combat that risk is to remove them full stop. This is doubly true of new build properties, and we may see some of those products go first. Right now, there is a lot of uncertainty as to the future trajectory of house prices and lenders may hedge their bets by pulling or reducing the number of their riskiest loans.

The property market is known for its resilience but right now there is a very good chance we could see house prices drop, given how quickly and how dramatically things have changed in recent weeks. If prices do drop, the first owners to be impacted will be those that borrowed with a 5% deposit and they run a real risk of slipping into negative equity, causing high risk for lenders. It would be reasonable to assume that we will see 95% deals disappear from the market as lenders protect themselves in adverse conditions and wait for and market adjustments to take place. The unknown variable is whether there will be any government support.

The lack of 95% loan-to-value products will only be a temporary measure, much like when the first lockdown happened. Once lenders get more confident with what is happening to the housing market and house prices, they will come back. Otherwise, you are taking a big section of the first-time buyer out of the market.

The removal of 95% loan-to-value mortgages would be catastrophe as it would effectively put first-time buyers out of reach of being a homeowner overnight. It's important to remember that not all buyers have the luxury of having a family member who can help financially towards their deposit. Lenders will most likely increase their rates to mitigate the risk on their 95% loan-to-value mortgages if the property market starts to dip. 5% deposit mortgages will still exist but be more expensive.

The 95% loan-to-value mortgage won't die, but there will almost certainly be fewer of them due to the current economic situation. Equally, I am sure they will be resurrected once stability is back and confidence in the government has resumed. As a broker who tends to advise a lot of first-time buyers, most of mine have 10% saved or are even more fortunate and have gifted deposits, so the reduction in 95% loan-to-value products may affect a smaller market share than many think.