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Mortgage rates rise for those with a small deposit

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Written by: Christina Hoghton
12/04/2017
Bad news for first-time buyers and existing homeowners without a large deposit, as mortgages become more expensive

Mortgage borrowers with a small deposit will be frustrated to hear that, despite interest rates being at record low levels, the cost of mortgages at 95% of the property’s value has risen.

The average two-year fixed rate has increased significantly, by 0.25 percentage points since January alone, despite no jump in wider interest rates.

It is now 4.14% compared to 3.89% in January, according to financial information provider Moneyfacts.

Charlotte Nelson, finance expert at Moneyfacts, said: “Back in January, the average two-year fixed rate at 95% loan-to-value (LTV) reached an historic low. 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 to the average two-year fixed rate at 95% LTV is in part due to the current uncertainty in the market, particularly the 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.”

But the hike is also due to the removal of the influential and successful Help to Buy Mortgage Guarantee Scheme, which ended in December. Not only did it reduce rates for the lenders that took advantage, it prompted competition across the low deposit market.

Nelson added: “While all lenders who previously took part in the Help to Buy Mortgage Guarantee Scheme have since launched standard products, they are now exposed to the full risk of offering a 95% deal, which was previously shared with the Treasury. Instead of swallowing the extra cost, these providers are choosing to pass it on to the borrower in the form of higher rates.

“The news of a rise in rates for 95% LTV mortgages is a disappointing blow to first-time buyers, 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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