The mortgage market is currently seeing some of the most competitive rates in its history as lenders seek to use the significant amount of funding they have to secure market share – and, as a consequence, they are currently willing to offer rates which 12 months ago might have seemed unthinkable.
Of course, we tend to fixate on the headlines generating by the ‘Best Buy’ rates so there is a lot of talk about two-year fixes at 60% LTV being in the 0.84% range (as I write) and five-year fixes being below 1% for the same LTV, and seemingly dropping further. Undoubtedly a five-year fix at 0.94% – currently available from HSBC – will catch the eye, but for the vast majority of borrowers, and certainly for first-time buyers, that type of rate is completely unachievable.
What might be of more interest to borrowers is average rate levels at higher LTVs because they tend to look more like the rates they can access. So, for example, Moneyfacts’ latest review of average two- and five-year fixed-rates is always going to raise interest because it tends to look more like ‘real life’ for many borrowers.
And there is some good news here. Not just in the rate levels but also in the number of products available at higher LTVs, which we know are more likely to be the types of mortgages available to first-timers.
According to Moneyfacts there are currently 283 95% LTV products available, up from just 14 in September last year. Current average rates are 3.57% for two-year fixes and 3.83% for five-year which, to be positive, have moved down from the average rates which were available earlier in the year, when the 95% LTV mortgage market started to show signs of life again.
However, these are significantly above average mortgage rates in general. Right across the board for all products at all LTVs, the average two-year fix-rate is 2.38%, and the average five-year is 2.63%.
Even if you can stump up double the deposit – 10% – first-timers’ average rates are still not in this ballpark, although they are a lot closer and there is more choice. There are currently 579 90% LTV products available (up from 62 last September) and the average two-year fix is 2.85%, while five-year fixes average at 3.23%.
Compare this with 60% LTV where rates are, on average, 1.51% for a two-year fixed-rate deal and 1.71% for a five-year fix, although as mentioned previously, for some borrowers there are sub-1% options available which will save those borrowers even more.
So, why does this matter? After all, you might well argue that lenders are always going to offer their most competitive rates to those they deem of less risk. However, it is also within the largesse of lenders to be able to provide first-timers/those requiring high LTV mortgages with something more of a level playing field in terms of rates, and a mortgage future which does not see them having to pay much more in interest over the life of their mortgage.
Take, the recent Halifax average UK house price of £262,954 and work out how much 95%/90% and 60% LTV borrowers will pay up front and over a 25-year term and you will see what I mean.
Now, I’ll caveat this by knowing full well that the current rate is unlikely to be the one the borrower takes through their entire mortgage, and as they pay the debt down and their equity grows, they too are likely to get access to more competitive rates. But it’s still an informative exercise to go through because it shows what first-timers are looking at.
Using the average rates mentioned earlier on, we can see that a borrower putting down 5% of the average Halifax house price will require a mortgage just shy of £250k. Which, for a 25-year mortgage, means they’ll pay £1,260 per month on an average two-year fixed-rate and £1,295 for the corresponding five-year rate. Over the full term it means they’ll end up paying between £378k-£389k in total mortgage costs.
Put down 5% more and the figures change to a £236.6k mortgage costing between £1,104 and £1,151 per month or between £331k-£345k in total mortgage costs. Be lucky enough to have 40% and your £197k mortgage will cost between £790 and £808 per month and the total costs will be between £236k and £242k.
In other words, as a first-time borrower putting down a 5% deposit, you will pay more than £140k in interest over the lifetime of your mortgage than someone who can put down 40%. And you’ll pay more than £45k in interest than someone who can put down just 5% more than you.
This is a big discrepancy and, again I understand these are not real-world examples and much will change within a borrower’s life – not least the fact they are likely to move home/mortgage a number of times – but it gives a sense of what first-timers can anticipate in terms of the total costs they will have to pay, compared to those deemed less risky.
We talk a lot about various schemes and Government measures to get first-timers onto the ladder, but we perhaps neglect the cost disadvantages they immediately encounter, even if they can get a deposit together. An overwhelming focus on trying to secure low LTV business is perhaps obscuring these discrepancies, and while we all welcome the greater availability of high LTV products, the difference in rates and the significant costs this means for first-timers is something that should be addressed.
Patrick Bamford is business development director at AmTrust Mortgage & Credit