Mortgage lenders have been cutting interest rate margins at the highest loan-to-value (LTV) levels with the gap between the highest two bands at its tightest in six years.
According to Moneyfacts, the difference between the average two-year fixed rate deal at 90 per cent LTV and 95 per cent LTV has fallen to just 0.65 per cent – down from a high of 1.57 per cent in October 2017.
During this time, average interest rates on 90 per cent LTV deals have remained largely unchanged at 2.65 per cent today, while typical 95 per cent rates have dropped from 4.19 per cent to 3.30 per cent.
Along with these falls in rates, there has also been a growing number of lenders and products entering the higher LTV markets.
Competition pushing rates down
Moneyfacts said it was evident that “healthy competition” among lenders was the reason for pushing rates and margins down.
“This is fantastic news for potential first-time buyers who are looking to find their first step on the housing ladder,” it added.
However, the difference in margin is also starting to impact the market with many high street lenders reporting cuts in their net interest margins in annual results, the difference between savings and lending rates.
And the competition throughout the market has led to lenders withdrawing as they are unable to cope with the increasing risk and falling rates.
Lenders forfeiting risk provision
“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,” said Moneyfacts spokesman Darren Cook.
“Therefore, the biggest contributing factor to the difference between a 90 per cent and 95 per cent 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 per cent LTV – but as we’ve seen, they’re increasingly willing to sacrifice these margins in order to compete.”
Owain Thomas is features and contributing editor of Mortgage Solutions and editor of Specialist Lending Solutions.
He also has experience in the protection, pensions, workplace benefits and HR areas.
Owain has won two Headline Money Awards and the Protection Review’s Journalist of the Year award.