Leanne Macardle

Leanne Macardle

Editor
Published: 25/03/2019

It can be a definite struggle for first-time buyers to get on the ladder, but happily, things could be starting to ease slightly, as mortgage providers are actively competing for this new business – and mortgage rates are falling accordingly.

That's according to the latest research from Moneyfacts.co.uk, which shows that the margin between the average two-year fixed mortgage rate at 95% and 90% loan-to-value (LTV) is at its narrowest since February 2013, signalling reduced pressure at the highest LTV band. Indeed, the figures show that the difference between these two higher LTV rates currently stands at 0.65%, down from a high of 1.57% in October 2017, something that's been driven by average rates at 95% LTV falling dramatically since then – offering hope for borrowers who can only amass a 5% deposit.

The table below highlights the changes in more detail. As you can see, average rates at 95% LTV have fallen substantially in recent years, and while those at 90% LTV have also fallen, it hasn't been to the same extent, and they've actually edged up from the low point seen two years ago.

Average two-year fixed rate higher loan-to-value margins

 


Max 90% LTV average rate


Max 95% LTV average rate


Margin attributed to risk


Today


2.65%


3.30%


0.65%


Jan 2019


2.69%


3.46%


0.77%


Oct 2017


2.62%


4.19%


1.57%


Feb 2013


4.80%


5.43%


0.63%


Source: Moneyfacts.co.uk


Rising competition

"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," said Darren Cook, finance expert at Moneyfacts.co.uk.

This seems to suggest that they're sacrificing some of their margin for risk in order to compete, as Darren continues: "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, as the table above highlights, the average two-year fixed rate at max 90% LTV has actually 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, arguably amid providers' desire to secure the business of potential first-time buyers, who are the lifeblood of the mortgage market.

"This is fantastic news for those who are looking to take their first step on the housing ladder," said Darren, though he cautions that 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."

This means it's vital to make sure your finances are thoroughly up to scratch if you're thinking of buying your first home, as providers will scrutinise your income and outgoings to be sure you can comfortably afford the mortgage. Knowing that your credit score is as good as it can be is just as important – check your score using a credit check provider and note where any improvements can be made – and make sure you've got more than enough saved for a deposit to cover the additional costs associated with buying a home.

Then, it all comes down to finding the best first-time buyer mortgage rate, which is where our Best Buys come in! Securing a low rate can be one of the best ways to boost your affordability profile as you can keep your repayments as low as possible, so start comparing rates and get one step closer to making your dream of home ownership a reality.

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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