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Mortgage rates have been on a general downward spiral for what seems like years, yet unfortunately, it looks as though the tide could be turning. This is particularly the case for first-time buyers, with our latest research showing that the average rate at 95% loan-to-value (LTV) – prime first-time buyer mortgage territory – has risen by a whopping 0.25% since January.
That's according to the latest Moneyfacts Mortgage Trends Treasury Report, due to be published tomorrow, which shows that the average two-year fixed mortgage rate at 95% LTV has almost returned to levels seen a year ago.
As the table below shows, the average rate has risen substantially in just three months and now stands at an average of 4.14%, well above January's record low of 3.89% and just shy of the 4.15% recorded in April 2016, as uncertainty begins to take its toll.
|Average Two-Year Fixed Rate||Apr-16||Oct-16||Jan-17||Apr-17|
"Back in January, the average two-year fixed rate at 95% LTV reached an historic low," said Charlotte Nelson, finance expert at Moneyfacts. "However, since then the rate has shot back up dramatically, effectively cancelling out any gains made in the past year as the two-year average now approaches April 2016 levels."
This increase is partly due to the current level of uncertainty in the market, she explains, particularly in regards to inflationary pressures. As inflation rises, the probability of borrowers defaulting also rises, due to household expenditure being adversely affected; this makes the low rates seen previously unmaintainable, as providers seek to become less competitive and reduce their risk.
"The 95% LTV market has also seen a significant adjustment with the removal of the Help to Buy (H2B) mortgage guarantee scheme in December 2016," added Charlotte. "The scheme provided a significant boost to the market, not only by increasing product availability, but also by becoming a catalyst for mortgage competition in this key area of the market. Now that it's gone, things have changed."
This is because lenders who are still active in the 95% LTV sector are now exposed to the full risk of offering a 95% deal, whereas those who participated in the scheme would have shared that risk with the Treasury. This means those who have since launched standard products are doing so at higher rates – rather than absorbing the extra cost associated with higher risk lending, they're passing it on to the borrower.
Not only that, but providers who were outside the scheme had to compete fiercely with those within it, which meant rates were pushed ever-lower. However, as they're now no longer competing with H2B deals, they no longer have to sacrifice their margins to remain competitive, so are raising their own rates in response.
However, it isn't all bad news. Rates may be rising, but as Charlotte points out, the level of product availability in this sector has never been better, and there are still plenty of top deals to choose from.
"The news of a rise in rates for 95% LTV mortgages is a disappointing blow to first-time buyers," said Charlotte, "as these are often considered the lifeline of the mortgage market. However, borrowers should not be too concerned, as there is still much more choice in the market than there was just a few years ago. Borrowers will just have to shop around a bit more diligently to ensure they can still get the best deal."
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