Mortgage Providers Encourage First-time Buyers Cutting Margins on 95% loans

By: MoneyFacts

The latest research from Moneyfacts.co.uk shows that the margin between the average two-year fixed mortgage rate at maximum 95% and 90% loan-to-value (LTV) is at its narrowest since February 2013, with the difference between these two higher LTV rates currently standing at 0.65%, down from a high of 1.57% in October 2017. This has been driven by average rates at 95% LTV falling dramatically since then, offering hope for borrowers who can only amass a 5% deposit.

Darren Cook, Finance Expert at Moneyfacts.co.uk, said:

“It is evident that healthy competition among mortgage providers at the maximum 95% LTV tier has been the catalyst in causing the average two-year fixed mortgage rate at this level to fall by 0.72% in the last year, down from 4.02% in March 2018 to 3.30% today.

“A mortgage provider’s provision for costs, such as funding and administration expenses, are seemingly a constant addition to a mortgage rate, irrespective of different LTV tiers. Therefore, the biggest contributing factor to the difference between a 90% and 95% LTV mortgage rate can be attributed to a provider making provision for future ‘probability of default’ on the mortgage. In other words, providers need to factor in the greater potential of default on higher-LTV mortgages, which is why rates are typically higher at 95% LTV – but as we’ve seen, they’re increasingly willing to sacrifice these margins in order to compete.

“Indeed, the average two-year fixed rate at max 90% LTV has changed little since October 2017, increasing by only 0.03% to 2.65% today. However, the average at max 95% LTV has fallen by a significant 0.95% to 3.30% over the same period. It therefore seems that mortgage providers are forfeiting a portion of their provision for risk at this higher tier in their desire to secure the business of potential first-time buyers, who are the lifeblood of the mortgage market.

“This is fantastic news for potential first-time buyers who are looking to find their first step on the housing ladder. However, even though mortgage rates at the 95% LTV tier are falling, it may not be that simple; since the financial crisis, the Financial Conduct Authority has introduced clear affordability measures that mortgage providers must follow, so potential first-time buyers will still need to jump through several affordability hoops before they find themselves on the property ladder.”

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