U.K. Mortgages Reach 13-Year High

The Financial Times reported that Lloyds Bank and NatWest plan to re-introduce 90% loan-to-value mortgages (LTV). Due to COVID-19, banks removed 90% LTV products from the market for most of the year to reduce lending risk. Higher LTV mortgage products are incredibly popular as it allows homeowners to save thousands on a deposit. For example, a homeowner looking to purchase a property worth £500k can save £25k on a deposit by obtaining a 90% LTV mortgage instead of an 85% LTV mortgage.

However, despite the removal 90% LTV products, the demand for mortgages skyrocketed in the second half of the year due to the temporary removal of Stamp Duty Land Tax (SDLT) which will expire in March 2021.  The new measures allow homeowners to save up to £15k in taxes when buying a new property.  This created a housing market frenzy as both buyers and sellers looked to take advantage of the new rules.  Looking at Exhibit 1, the number of mortgages approved in October reached at 13-year high at 97,532, which is a year-over-year (YoY) increase of 51.1%.  October’s figure is ten times higher compared to the trough of 9,355 approvals in May 2020 when SDLT was still in effect.

The demand for 90% LTV mortgages will be highly anticipated by the market.  However, banks have anticipated this pent-up demand and have significantly raised interest rates on 90% LTV products.  According to Refinitiv Datastream, the average interest rate on a 2-year fixed 90% LTV mortgage has risen sharply to a five-year high of 3.67% in November, compared to 1.89% in April 2020.

Exhibit 1: U.K. Mortgage Approvals

The temporary removal of SDLT revived the housing market in 2020 and led to higher prices across the country despite COVID-19 and a possible no-deal Brexit.  As shown in Exhibit 2, the U.K. Nationwide average house price in November 2020 stood at £229,721, resulting in a 6.5% year-over-year increase.  This compares to the average home price of £215,282 at the beginning of the year.

1 2 3
View single page >> |

Get unique value-add analytics and predictive financial modeling, dedicated to making investment research smarter with more

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.