"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 buyer"
Its figures show that the margin between the average two-year fixed mortgage rate at 95% and 90% LTV is at its narrowest since February 2013. The difference currently stands at 0.65%, down from a high of 1.57% in October 2017.
Moneyfacts says 95% LTV rates have fallen "dramatically" since then, offering hope for borrowers who can only amass a 5% deposit.
Darren Cook, finance expert at Moneyfacts, 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.”
