Following last month's increase in mortgage rates, it was widely expected that the run of low rates had come to an end. However, our figures show that the average two-year fixed rate has now fallen back to the level recorded in August, but all may not be as it seems – much of this reduction has been driven by ongoing competition in the high loan-to-value (LTV) sector, and without this, rates would be continuing to rise.
The average two-year fixed rate has fallen by 0.04% this month, down from September's rate of 2.72% to stand at 2.68%, meaning that it's returned to the lowest rate on record. It'll come as welcome news to borrowers who still want to snap up a low-rate mortgage before base rate begins to creep up, and in even better news, they've now got more choice than ever before – the figures show that product numbers rose by 88 this month to stand at a new all-time high of 4,144, surpassing the previous record of 4,059 set in July this year.
This shows that competition is continuing to intensify across the market, but it's the high-LTV sector where this competition is most keenly focused – in other words, it's a great time to be a first-time buyer! The total number of fixed 95% LTV mortgages available has risen by a notable 44 products in the last month, accounting for half of the overall increase, with the total number of 95% LTV products available now standing at a new record of 241.
The ongoing, and indeed heightened, competition in the sector has led to a resulting drop in rate, with the average two-year 95% LTV mortgage now boasting a rate of 4.39%. This marks a drop of 0.06% on a monthly basis, and suggests that providers continue to be willing to sacrifice risk in order to attract borrowers, a trend that's been noted for much of the last year.
However, the pattern is different elsewhere, with rates at the lower end of the LTV scale posting marginal increases. Average rates at 65% and 70% LTV, for example, both rose by 0.02% in the last month, but given that they're still far lower than the average (1.76% and 2.39% respectively), it shouldn't cause too much concern for borrowers.
The fact that this pattern could continue, however, might: the reason rate reductions are concentrated at the upper end of the LTV spectrum is because margins are higher, so providers can afford to sacrifice risk to compete. Conversely, rates at the lower end of the scale have no such margin – pricing therefore becomes more centred on risk, giving a truer picture of how the market should really be developing if competition wasn't such an influencing factor.
This can be seen when looking at other sectors of the market. The average five-year fixed rate, for example, has edged up further this month, rising by 0.03% to stand at 3.31%, the second consecutive monthly rise in average rate. In contrast to the two-year sector, rates at the higher end of the LTV scale have actually fuelled this increase (the 91-100% LTV tier saw a rate rise of 0.05%), and it's all due to continued speculation over base rate.
A rise to base rate will have a far greater impact in this sector of the market: it's almost guaranteed to happen in the next five years, and it'll understandably have a considerable impact on household expenditure. Your risk of default is therefore higher over a five-year term, which means that providers can't afford to sacrifice risk and continue lowering rates, so they're edging them up instead – and in all likelihood, will continue to do so.
It's a similar story in the variable rate sector, with base rate uncertainty being a key driver behind the latest rate increase: the average tracker rate now stands at 2.05%, up 0.02% from September and the third consecutive monthly rise.
So what does it all mean? Quite simply, it means that if you were thinking about taking out a mortgage but were waiting for rates to reach their lowest point, now's the time to act! Given that it's higher LTVs that have driven this month's drop in the average two-year rate, it's unlikely that rates will drop much – if any – further, so you don't want to hang around.
Rates in other sectors of the market are already on a firm upward trajectory, and the closer an increase to base rate becomes, the more likely it is that this trend will continue, so don't wait any longer – if you want to truly benefit from low mortgage rates, make sure to start comparing the options before rates at all levels begin to edge up.
Remember, in order to secure a mortgage, credit card or personal loan you need to have a good credit rating. To find out if yours has a clean bill of health, contact a credit check provider, such as Experian CreditExpert to investigate your credit report.
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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