The Spring budget revealed by the Chancellor of the Exchequer had a number of newsworthy solutions to the current economic downturn, but none that will see such a staggering domino effect as the Government’s mortgage guarantee scheme.

The strategic move pledges that the Government will cover 95% of a lender’s losses incurred above 80% loan to value if a property is repossessed, in an attempt to encourage more lenders to begin offering high loan to value (LTV) mortgages again.

When Covid-19 hit, many mortgage providers were concerned about taking risks with lending, and so withdrew their 95% mortgage products whilst the country navigated the twists and turns of the pandemic. Uncertainty around jobs, particularly in the hospitality industry, and with it, the concerns about increased borrowing, simply meant that mortgage lenders opted for the safer option of only offering lower LTV mortgages. This resulted in many prospective homeowners with a smaller deposit spending much of last year and the first quarter of this year with no options available to them, and this has caused a massive backlog in people who had to put their new home dreams on hold whilst the pandemic played out.

The Chancellor, Rishi Sunak, was praised for the unveiling of his solution to this problem, and in the past month alone we’ve seen high LTV mortgages begin to make a dramatic return. On the 1st of March, there were only five specialist mortgage deals available at 95% LTV, most of which required a guarantor or were restricted to local borrowers of building societies, making the barrier to homeownership evermore present to those with small deposits. However, since the Chancellor’s budget announcement on the 3rd of March, there are now 29 mortgage products available to buyers with a 5% deposit, and that number is only expected to increase further as the build up of prospective homeowners threatens to flood the dam which has been holding them back over the past year.

In March last year there were 391 deals of this LTV available, which means that if the market returns to this amount following the UK’s easing of lockdown and a gradual return to normality, we could expect the number of high LTV mortgages to increase by almost 1400%. In the coming months, lenders are expected to drastically expand the options available, now that they have a safety net from the Government, but this will also open the doors to the masses of prospective customers that have been patiently waiting on the other side.  

According to the Intermediary Mortgage Lenders Association, mortgage lending is expected to rise to £283bn this year, as household consumption was constrained in 2020, meaning some people have had the opportunity to save for a small deposit, yet have had no way to spend it – until now.

Along with an expected surge in high LTV mortgage products, will come a surge in applications, and some lenders may not be prepared for the rush. They risk not being able to handle the increased level of business, which could lead to unnecessarily rejecting some customers or adopting a “yes to all” approach, both of which could lead to significant problems. Providers in the mortgage sector should look to implement new technology solutions as soon as possible, to best prepare for the flood-gates to open and the applications to come pouring through.

One clear-cut solution is to look at using automated decisioning to streamline this process and effectively assess a consumer’s affordability and reduce lending risk. ADP by LendingMetrics is a multi-award-winning automated decision software that allows mortgage lenders to utilise proprietary data solutions, credit risk data and Open Banking solutions to process applications, and easily make credit policy changes as-and-when needed. To book an exploratory call with a LendingMetrics’ credit risk professional and discuss the best solutions to prepare for the months ahead, click here now!