Homeowners with little equity are more than twice as likely to fall behind on mortgage payments than those who put down at least a quarter of the purchase price, according to a report unveiled on Thursday.
The report, from Standard & Poor’s, the credit rating agency, found that while 3.2 per cent of homeowners who put down 20-30 per cent of their mortgages were in arrears on repayments, the rate of arrears for those who put down 10 per cent or less was more than twice that level, at 7.1 per cent.
Among those whose loans were 110 per cent or more of the property value, arrears rates were 28 per cent. The findings were part of a larger report based on loan-level analysis of £150bn of residential mortgage-backed securities (RMBS) created by the nation’s nine largest home lenders.
The findings suggest that large loans to first-time buyers are unlikely to resume in the foreseeable future.
Since the credit crunch hit, banks have been demanding that most borrowers stump up at least 25 per cent of the purchase price of a new home, a requirement that has kept many would-be first-time buyers out of the market. The inability of these consumers to buy a first home is seen as a significant drag on house prices.
Moreover, the study, which looked at mortgage performance as of June, found that an uneven recovery in house prices since the trough in April 2009 has left far more borrowers in northern regions in negative equity than in London and the south. Among borrowers in the north-west, 10.7 per cent owe more than their house is worth, while just over 1 per cent of those in London and the south-east are in that position.
Andrew South, credit analyst in the structured finance unit at S&P, said borrowers with high loan-to-value ratios – those whose loans were nearly as big, if not bigger, than the value of the property bought – might not necessarily be first-time buyers. Only 17.3 per cent of the 1.5m loans covered by the study were made to such buyers.
Those with high-LTV loans were as likely to be overstretched borrowers who had refinanced their homes, extracting additional equity with each new loan as house prices rose, he said.
“Banks have always known that lending at high LTVs is riskier,” Mr South said. “First-time buyers may be particularly problematic because they are not used to handling debt or they may have a high loan-to-income ratio.”
Given that capital available to banks is scarce, he noted, banks were limiting loans to the safest borrowers and raising prices sharply for those with smaller downpayments.
However, Mr South said that the fact that some borrowers had little to lose by walking away from their mortgages because their investment was so low did not necessarily mean they were deliberately falling behind on repayments. “It’s not exactly causal” Mr South said, although there was a correlation.
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