First-time buyers benefit as LTV rates fall

Manchester town hall

First-time buyers will welcome the news that two-year fixed rate mortgage rates have fallen over the past five years, with the 90% and 95% loan-to-value (LTV) tiers reducing consistently month-on-month since August 2018, research carried out by Moneyfacts.co.uk shows.

Analysis by Moneyfacts.co.uk reveals that while rates have reduced across all LTVs, higher LTV tiers had the most significant reductions, with the average two-year fixed rate at 95% LTV decreasing by 2.08% to 3.25% in the past five years. Over the same period however, the maximum 60% LTV tier has fallen by around half that figure (1.06%) from 2.96% to 1.90%. This is good news for first-time buyers, who typically have a deposit of between 5% and 10%, as it means that they are able to take their first steps onto the housing ladder with more favourable rates.

In addition to this, provider competition within the higher LTV tiers has also increased notably since May 2014, with the number of products available in the 90% LTV tier increasing by 144 to 288 products and 95% LTV by 73 to 147.

Darren Cook, financial expert at Moneyfacts.co.uk, said:

“First-time buyers or those borrowers seeking higher LTVs seem to have benefited the most as providers appear to be competing for this business by driving interest rates down. In fact, the average two-year fixed rate at 95% loan-to-value has fallen by 2.08% to 3.25% over the past five years and the disparity between the average two-year fixed rate at 90% and 95% LTV has nearly halved to 0.60%. As a result, although those first-time buyers able to raise at least a 10% deposit – where the average rate now stands at 2.65% – will still ultimately benefit compared to borrowers with a 5% deposit, they will benefit less significantly than they would have done five years ago.

“The trajectory of LTV risk curve seen five years ago is possibly what one would expect considering the incline in interest rates as the probability of default escalates up the LTV tiers. However, today’s curve trajectory indicates that downward pressure on interest rates across most of the LTV tiers has caused this LTV risk curve to flatten, as providers seem to have sacrificed some risk by lowering rates at the higher LTV tiers in order to maintain a competitive edge.

“Indeed, as interest rate margins have narrowed, the rate spread between the 70% and 90% LTV tiers has reduced from 0.46% five years ago to 0.11% today, while the difference in average rate between the low-risk 60% and 70% LTV tiers has reduced from 0.88% to 0.64% over the same period.

“With the current intense competition and squeezed margins, in particular at the riskier high LTV tiers, it is unlikely that providers will be able to decrease interest rates much further. With the LTV risk curve appearing flatter, it is important that borrowers look at all appropriate LTV tiers to see if they are getting the best product to suit their needs.”

(c) Moneyfacts.co.uk, May 2019