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First-time Buyer

Small deposit premium shrinking

Joanna Faith
Written By:
Joanna Faith

The gap between rates for borrowers with large and small deposits is narrowing, as competition heightens in the high loan-to-value market.

The difference in rates between the average two-year fixed mortgage at 60% and 90% loan-to-value (LTV) has reduced by 0.93% to 1.03% in just two years.

Heightened competition in the mortgage market has given those with smaller deposits a boost, as not only are there more deals for borrowers to choose from but there are also lower rates, reducing the premium paid by those with small deposit.

Charlotte Nelson, finance expert at Moneyfacts.co.uk, said: “The fact that the difference in rates between two-year fixed 60% and 90% LTV mortgages is shrinking is excellent news for borrowers with small deposits. With the lowest two-year fixed rate at 90% LTV now standing at 1.99%, those with a deposit of just 10% can now secure a rate that was previously reserved for those with a much greater equity in their home.

“Although a rise in base rate seems to have faded into the background for the time being, it seems providers are still choosing to lower rates now in preparation, so that when base rate does rise and borrowers are incentivised to remortgage, they will see their current lender as a competitive option.”

Up the risk curve

Providers initially chose to lower rates for ‘less risky’ borrowers, so the majority of cuts were aimed at the 60% and 65% LTV tiers, according to Moneyfacts. However, as each sector of the market became saturated with highly competitive deals providers started to branch rate cuts out into higher LTV bands, causing the difference in rates between 60% and 90% LTV mortgages to become narrower.

At the same time, the launch of the Help to Buy scheme has made it increasingly acceptable to lend at a higher LTV.

Nelson added: “Demand for high-LTVs is always robust so the fact that there is not only more deals on the market but the overall cost is also cheaper is a welcome development. What’s more, thanks to the Mortgage Market Review, the strength of this market is not an indication that there has been a return to risky practices. Indeed, it has never been more important for potential borrowers to prove that they can afford the mortgage.”