The FCA has warned that borrowers who took out Help to Buy loans could be at increased risk of negative equity in a paper outlining areas of concern across the financial services market.

The watchdog also noted that intense competition was prompting some lenders to increase their risk appetite and could drive more lenders out of the sector.

Strong competition as well as the dominance of five-year fixed rates leading to lower numbers of future transactions could push further lenders out of business, the FCA predicts.

In its Sector Views 2020 paper published today, the regulator says: 

“By the end of 2018, 211,000 consumers had used Help to Buy schemes to buy properties.

“Sixty per cent of HTB first-time buyers paid the minimum deposit of 5 per cent, compared to 40 per cent of non-HTB first-time buyers.

“There is potential for these consumers to be more exposed to any change in economic conditions. 

“A stagnant housing market, combined with the ‘new build premium’, could see a reduced number of re-mortgage options relative to a non-HTB property. 

“They are also more likely to face negative equity if property prices begin to fall.”

The FCA goes on to say that increased competition has resulted in better rates for borrowers with many firms chasing a shrinking pool of customers. 

But it warns: “This has led to some firms stretching their affordability assessments to lend to potentially higher-risk customers.

“Challenging conditions have also led some firms to leave the market with others expected to follow, especially as the trend for five-year fixes is likely to reduce consumer activity in the mortgage market.”

It adds that: “Greater competition for fewer borrowers has seen smaller lenders increasingly targeting higher risk borrowers.”

“More firms chasing a smaller number of consumers has led to four firms (Tesco, Sainsburys, Secure Trust and Magellan Homeloans) ceasing to lend. 

“We expect to see further firms ceasing to lend in the near to medium-term.”

The FCA also expressed concern over the number of firms still using Libor.

It says: “Over 200,000 mortgage contracts are Libor-linked, but Libor is expected to cease to be available after 2021.

“Firms need to consider how their contracts will operate when Libor no longer exists, and whether the terms allow the contract to be moved to an alternative benchmark.

“A small number of firms are still offering Libor-linked mortgages.

“We are monitoring this issue closely.”