Mortgage Monitor: What can we learn from the lending that took place during Q1?

For anybody that’s endured weeks of lockdown, the period between January and March of 2020 may seem like another time altogether. Bank of England data suggests activity in the mortgage market was at its highest level for five years, and it wasn’t until mid-March that European economies began to move into lockdown to prevent the spread of Covid-19.

This week, the Financial Conduct Authority published mortgage lending statistics for the first quarter. As the Times economics editor noted ahead of this Friday’s Q1 GDP release - life is changing so fast that six-week old data might as well be a cave painting.

However, despite the unprecedented changes we’ve seen in the lending environment, there are three important lessons we can take from the data:

1. Lenders are still eager to support the demand for borrowing

The outstanding value of all residential mortgages loans was £1,509 billion at the end of 2020 Q1, 3.9% higher than a year earlier. Meanwhile, the value of gross mortgage advances was £65.8 billion, 3.8% higher than a year earlier, according to the FCA.

“The data reveals the depth of confidence in property at the time from both borrowers and lenders,” says Alex Ogario, Head of Private Office at Knight Frank Finance.

“Banks were increasingly lending at higher LTVs, demonstrating their willingness to move up the risk curve, and the outstanding value of mortgages continued to climb, which is indicative of more purchases.

“This has all been upended by Covid-19, but it’s important to remember the fundamentals that underpinned the market before the crisis as they will help us to understand the potential in the post lockdown environment.

“The big unknown is how long the repair will take, but we’re already seeing lenders reintroduce previously withdrawn products, with availability climbing more than a fifth since the depth of the crisis.

“This suggests lenders remain eager to support demand from borrowers as they find their feet amid these new conditions.”

2. High LTV lending will return, but it’s taking time

The share of mortgages advanced in 2020 Q1 with loan to value (LTV) ratios exceeding 90% was 5.2%, 0.7pp higher than a year earlier, the FCA data shows.

Though lenders are now edging up the LTVs they are willing to lend at, products at 90% LTV accounted for just 1.4% of mortgage activity last week, down from an average of 6.6% before the pandemic.

“We’ve seen willingness from the lenders to reintroduce products at 90% LTV, but as soon as they do so they are inundated with applications from eager borrowers,” says Hina Bhudia, Partner at Knight Frank Finance.

“The banks are still working their way through applications that build up during the property market shut down, so it’s likely 90% LTV products will remain relatively rare until lenders have made in-roads to these backlogs.

“The good news is we’re seeing them make significant progress. Higher LTV lending is vital because it enables first-time buyers to purchase without having to inject huge amounts of capital, and we need that part of the market working to keep the entire market moving.”

3. Later Life Finance is in demand and growing in popularity

Lifetime Mortgages accounted for 1.68% of total lending in the first quarter, up from 0.75 five years ago, according to the FCA. To put that in context, that’s an extra £760 million in finance granted to older homeowners in the first quarter compared to the same period in 2015.

The data reveals a longer term shift in demand for Later Life Finance that is underpinned by demographics, suggesting it’s likely to continue to grow as the property market emerges from lockdown.

“The data is yet another indicator that Lifetime Mortgages are becoming more popular and more relevant for older homeowners,” says David Forsdyke, Later Life Finance expert at Knight Frank Finance.

“We’re seeing people using Lifetime Mortgage for an increasing number of reasons including to top up their income, perhaps due to disappointing pensions or the reduction in value of other asset classes.

“We’re also seeing a shift in attitudes as we all begin to live longer and older homeowners seek to distribute property wealth to family members when they most need it in their younger years.

“These are long-term shifts that a likely to grow in the years ahead.”

If you want to discuss your options in more detail and find out what the current market means for your mortgage, do get in touch.