A “glut” of mortgage deals aimed at buyers with small deposits pushed the number of homeowners vulnerable to a slump in property prices to a post-crisis high in June, according to the UK’s biggest chartered surveyor.
The number of households that took out mortgages with deposits of 15pc or less of a property’s value rose to 10,898 in June, up from 9,750 in May and 7,166 a year ago, according to e.surv.
This means that high loan-to-value (LTV) lending now accounts for one in five of all new mortgages, the highest level since April 2008. This compares with just one in nine mortgages a year ago.
The e.surv data also revealed a prominent north-south divide in high LTV lending in June. More than a quarter of borrowers in the North West and Yorkshire took out high LTV loans, compared with just 7pc in London. It said lower wages in these regions meant an increasing number of borrowers were struggling to save for a deposit.
While the current levels are below those seen pre-crisis, when the number of high LTV loans reached 41,745 in February 2007 – or one in three loans – it means a growing number of households are at risk of falling into negative equity should prices fall sharply. Negative equity occurs when the size of a mortgage exceeds the price of the property it is secured against. Many homeowners were plunged into negative equity after the financial crisis because they took out high LTV mortgages only for property prices to fall in the downturn.
However, Richard Sexton, director of e.surv, said high LTV lending had helped to spark a return of first-time buyers to the market. “Banks have increased their array of high LTV options … helping keep the dream of homeownership alive for the bottom of the market,” he said.
He said steps taken by the Bank of England to curb risky lending by capping the amount of high loan-to-income mortgages – defined as more than 4.5 times a buyer’s income – to 15pc of new business would hit first-time buyers hardest. “Simplistic loan-to-income (LTI) caps are a step too far, and may tip hosts of creditworthy borrowers out of the market.”
Nemat Shafik, the Bank’s incoming deputy governor, defended its measures on Wednesday. She told MPs that household debt levels remained a concern and that a large minority of households had “multiple vulnerabilities to higher interest rates”.
Halifax house price data on Wednesday showed the market remained buoyant in the three months to June, with prices up 2.3pc – or £5,500 – compared with the first quarter. The average house price across the UK is now £183,462, according to the bank, up 8.8pc on last year. “The pace of increase is not slowing, but it has stabilised,” said Rob Wood, chief UK economist at Berenberg Bank.
Halifax said that house prices as a multiple of salaries had fallen slightly in June, but was still close to five times salaries.
Values as a proportion of incomes are still well below mid-2007, however. They reached 5.87 in July 2007.
The Royal Institution of Chartered Surveyors (RICS) also found evidence that the market was stabilising amid an increased “air of caution” among lenders. RICS said UK house prices in June remained positive but tougher rules introduced by the Mortgage Market Review (MMR) in April were “having a drag” on activity.
Simon Rubinsohn, chief economist at RICS, said the measures introduced by the Bank of England would have an “immediate influence on the market.”
“Buyer enquiries in the capital are now slipping back which suggests that the very sharp upward move in prices will flatten over the coming months,” he said.
RICS said a net balance of 53pc of respondents reported a UK-wide increase in prices in June, from 56pc in May. However, the balance of respondents expecting prices to rise over the next quarter fell to 26pc, from 46pc in May.