Lenders are optimistic that the increased availability of mortgages to borrowers with less than a 25 per cent deposit is set to continue.
The Bank of England’s latest quarterly credit conditions survey, published last week, shows borrowers found it easier to secure a mortgage in the first three months of the year, marking the third consecutive quarter of increased lending.
The outlook for first-time buyers also looks positive, with many lenders expecting to advance mortgages at higher loan-to-values in the next three months.
The credit conditions survey calculates lender sentiment by asking them to assign a figure of between -100 and 100 to questions around expected lending conditions and the actual lending environment. When the results are compiled, a net result, or “net balance” is generated which shows the sentiment among lenders as a whole.
When asked how mortgage availability had changed in Q1, lenders reported a positive net balance of 18.7 for those with a deposit smaller than 25 per cent. This is down on the positive net balance of 29 for Q4 but is still higher than the long-term average of 9.5.
Lenders posted a positive net balance of 9.1 that the number of loans extended to borrowers with LTV ratios over 75 per cent will continue to increase.
Lenders cited “market share objectives” as the main driver of increased credit availability in Q1, along with an increased appetite for risk and improved wholesale funding conditions.
Mortgage rates are also expected to fall as the spreads on secured lending tighten further. Lenders say there is evidence spreads narrowed in the first three months of the year and lenders expect rates to drop even further as the year progresses.
Such levels of optimism were unthinkable a year ago, with lenders much more negative when asked to predict mortgage availability in previous surveys. But can it be justified now?
Evidence suggests lenders have had a tendency in the past to understate the prospects for higher LTV lending.
Mortgages above 75 per cent LTV accounted for 31.9 per cent of all gross lending in Q3 according to figures from the Council of Mortgage Lenders. This had risen to 33.8 per cent by the end of Q4.
But the credit conditions survey shows lenders were actually pessimistic about high LTV lending towards the end of last year.
Trinity Financial communications manager Aaron Strutt says Government intervention has helped stimulate lending for those with smaller deposits.
He says: “It is fair to say there are more mortgages available to borrowers with less than a 25 per cent deposit. It was not very long ago that brokers could not place clients with a 10 or 15 per cent deposit, but there are now more options.
“The Funding for Lending Scheme is still helping many lenders to improve their propositions and it is good news the Bank of England is reporting an improvement.”
The FLS aims to make £80bn of cheap funding available to banks and building societies on the condition they lend more to small businesses and consumers in the hope this will kick-start the economy.
In the credit conditions survey lenders cited the scheme as a major factor in pushing down bank funding costs and generating cheaper mortgage rates – something they expect to continue into 2013.
Prolific Mortgage Finance managing director Lea Karasavvas says: “Certainly, in Q1 we have seen a massive uplift on the availability of competitive rates available over and above 75 per cent, specifically in the 90 per cent range where we have seen the rates cut by up to 2 per cent on where we were 18 months ago.
“The price wars we have seen from the likes of Abbey, Nationwide, Accord and Virgin to name but a few has seen rates drop considerably.”
SPF Private Clients chief executive Mark Harris notes the Bank reported that maximum LTV and loan to income ratios have increased slightly. But he points out the survey was not all positive.
Harris says: “The survey shows credit scoring remained as tight as ever, with the number of applications being approved falling slightly, suggesting there should be room for further easing.”
Lenders reported that credit criteria scoring criteria for granting loan applications worsened in Q1 but is expected to improve in the coming three months, with a net positive result of 5.3. This is the highest positive result in over three years.
Mortgage and protection advice firm Moneysprite managing director Ashley Brown says: “Lenders should be applauded for their drive to offer value across all LTVs. But this news is tempered by an increase in the number of applications being refused due to credit score. We are still seeing too many seemingly good applicants refused due to the cloak and dagger world of credit score or obscure criteria, and this needs to be a focus for the industry in coming months, if borrowing targets are going to become reality in 2013.”
Lenders seem to have underestimated the appetite for higher LTV, but yet seem to be overly optimistic about the prospects for mortgage availability overall. In Q4 lenders returned a net positive balance of 15.3 when considering the demand they expected in the first quarter of 2013. When asked how the first three months of the year had actually been, a net positive balance of half that – 6.4 – was reported.
Optimism among lenders that they are going to gear up lending in the coming months is to be welcomed, especially where it appears higher LTV lending will be encouraged.
But given that lenders have simultaneously downplayed the return of higher LTVs and overestimated overall buyer demand, the coming months will prove whether this optimism is grounds for celebration or not.