Strong competition makes low-deposit mortgages cheaper

Posted 1 June 2016 by Nick Parkhouse

The plethora of mortgages requiring a small deposit means rates have dropped closer to the best rates for high-deposit homebuyers...

Buyers with a small deposit are benefiting from ever cheaper mortgage deals as strong competition between lenders drives down the cost of borrowing.

That's the conclusion of new research by Moneyfacts, which has revealed that the gap in rates between the best deals and those available at a higher loan-to-value (LTV) has shrunk by almost 1% in the last two years. Buyers with a 10% deposit can now benefit from some excellent deals.

Borrowers with 10% deposit benefiting from better mortgage deals

Fierce competition between banks and building societies has increased the choice of mortgage deals and driven down the cost of home loans for buyers with a small deposit.

New research from financial analysts Moneyfacts shows that the difference in rates between the average two-year fixed-rate mortgage at 60% loan-to-value and 90% has reduced by 0.93% in just two years.  The average 90% mortgage rate is now just 1.03% higher than the average 60% rate.

Moneyfacts' Charlotte Nelson says: "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 much greater equity in their home."

The fact that lenders are now lowering rates for people who would once have been considered 'riskier' borrowers is particularly welcome, as Nelson explains: "Originally, providers chose to lower rates for 'less risky' borrowers, so the majority of cuts were aimed at the 60% and 65% LTV tiers.

"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."

Wide choice of 95% deals has also driven down the cost of mortgages

Moneyfacts also highlight the impact of the Help to Buy scheme. With more lenders now offering deals to borrowers with just a 5% deposit, the cost of 95% mortgages has fallen. The difference between two-year fixed mortgages at 60% and 95% LTV has shrunk by a significant 0.71% in just one year.

Nelson adds: "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."


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