The latest Quarterly Economic Bulletin from the Association of Mortgage Intermediaries says margin compression on mortgage deals is becoming a serious concern with too much money chasing too little return.
The trade body says funders are pouring cash into a market they believe is safe, seemingly without taking account of the economic uncertainty facing the UK. It goes on to say that any significant rise in unemployment, coupled with less tolerance for long-term arrears, will “begin to hurt, and fast”.
The report discusses how Britain’s economy is holding up reasonably well given the tide of political uncertainty but points out that high employment and low business investment point to poor and worsening productivity.
Ami says competitive pressures in the market are becoming heightened. The Bank of England noted that 4.4 per cent of mortgages advanced in Q4 had loan-to-value ratios exceeding 90 per cent, compared to 3.8 per cent a year earlier. That is a 15 per cent rise in lending appetite at the higher risk end of the market.
The proportion of high loan-to-income lending (loans greater than four times the value of annual income for a single buyer or greater than three times the annual income for joint buyers) remained at 46.9 per cent in Q4, its highest value since the series began in 2007 Q1.
Ami says margin compression has been commented on a number of times this year. It was notably given as the reason for Magellan Homeloans, AA Mortgages and Secure Trust Bank for stopping all new mortgage lending.
The report says: “Mortgage rates have nearly halved since the financial crisis, according to Moneyfacts data. The average two-year fixed rate home loan has fallen from 4.79 per cent in March 2009 to 2.49 per cent today. Similarly, the average five-year fix has dropped by 2.73 percentage points.
“That’s in spite of the base rate being higher today than it was 10 years ago. There is so little room for lenders to shave any more off price, that there is a notable move to differentiate on criteria. The Bank of England has been warning lenders about scaling up the risk curve for around nine months now, yet criteria appear to be relaxing.”
Several challenger banks are lending to borrowers with previous debt issues while competition for high loan-to-value market share has intensified. There are now 391 mortgage deals available at 95 per cent LTV.
Moneyfacts data also shows the percentage of mortgage products with a standard maximum mortgage term of 40 years has risen from 36 per cent five years ago to 51 per cent today.
The Ami report says: “There is too much money, chasing too little return in today’s market. Funders are pouring cash into a market they believe is safe, seemingly without taking account of the economic uncertainty facing the UK. It appears particularly obtuse to be chasing returns when the downside risks to our housing market are more significant than they have been in some time.”