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Mark Lofthouse: Mind the LTV rate gap

Mark Lofthouse Mortgage Brain

Current research into mortgage product data has revealed that the gap between the interest rates at different LTVs for the same type of mortgage is continuing to rise – and in its most extreme case, has more than doubled.

But what’s the story behind the figures and what does it mean for borrowers? 

Every quarter, we carry out a detailed analysis of the latest product data in the UK mortgage market. The research is based on a breakdown of all main product types (direct and broker) for a repayment mortgage and is calculated by the lowest rate for a property of £180,000.

Latest figures – as of 1December 2013 – show that the lowest rate for a 90 per cent two year fixed rate mortgage at 3.49 per cent is now 2.36 times or 136 per cent higher than the lowest rate product with a 60 per cent LTV at 1.48 per cent.

And the gap keeps getting bigger. Since the start of the year it has widened by 28 per cent, although both rates have fallen.

In terms of actual cost, these figures represent a substantial extra outlay for borrowers with small deposits.

The lowest rate two year fixed rate mortgage with a 90 per cent LTV is now calculated to cost 22 per cent more than the lowest rate 60 per cent product, a figure which has risen from 12 per cent in January 2013.

The figures for three and five year fixed rate products, while not as high as the two year fixed, are also quite revealing.

The lowest rates found for a three year fixed rate mortgage were 1.99 per cent for a 60 per cent LTV and 3.34 per cent for a 90 per cent LTV – representing a hefty 68 per cent rate difference.

Trackers track the same trend!

It’s a very similar story for tracker mortgages where the difference between the lowest rate 60 per cent and 90 per cent LTV tracker is almost as great – 2.1 times (or 112 per cent) higher, with the lowest rates currently standing at 1.69 per cent (60 per cent LTV) and 3.59 per cent for a 90 per cent LTV product.

Again, these rate differentials do close slightly when three and five year deals are analysed. The lowest rate three year 90 per cent tracker, for example, is now 40 per cent higher than the 60 per cent LTV product, while the interest rate for a five year product with a 90 per cent LTV  is 78 per cent higher.

As with fixed rate deals, these numbers have very clear and practical implications for borrowers. Based on the current data, those looking for a 90 per cent two year tracker will face an 18 per cent increase in the cost for the repayment compared to the lowest rate 60 per cent LTV product.

Buy-to-let

Our product data also includes all mainstream buy-to-let products and our latest research has shown that this side of the mortgage market follows a similar pattern.

However, the differentials – and in turn the costs to borrowers – are not quite so extravagant.

The lowest two year fixed rate buy-to-let mortgage with a 60 per cent LTV, for example, is listed at 2.49 per cent, while the lowest 80 per cent LTV was 4.14 per cent – representing an interest rate increase of 66 per cent.

The differences in the two year tracker market are even more marked.

The lowest rate buy-to-let tracker with an 80 per cent LTV is currently 131 per cent higher than the lowest rate tracker with a 60 per cent LTV.

The gaps in the three and five year tracker market are smaller still, even allowing for the fact that three year and five year 80 per cent LTV tracker mortgage deals are almost non-existent.

According to our data the lowest rate three year tracker with a 70 per cent LTV is just 7 per cent higher than the lowest rate 60 per cent LTV, while the lowest rates for a 60 per cent and a 70 per cent LTV five year product are exactly the same.

The good news – rates in general have continued to fall

Although the news for borrowers with small deposits may not be good, in general terms the situation for anyone seeking a mortgage is better. Interest rates, on the whole, have dropped significantly over the course of the year.

The interest rate for a 60 per cent LTV two year fixed rate for example has dropped almost 26 per cent since that start of the year – down from 1.99 per cent in January to 1.48 per cent at the start of December.

Trackers with a 60 per cent LTV have seen an even bigger rate drop – down 32 per cent since January 2013 from 2.49 per cent to 1.69 per cent.

It’s a similar trend for 90 per cent LTV products with an 11 per cent interest rate drop being seen for a two year Fixed compared to the start of the year and a 7 per cent rate drop for a 90 per cent two year tracker.

The statistics give no clear indication as to whether this fall is bottoming out across the market as a whole, although in the five year market the speed of the drop has lessened significantly. Five year fixed deals at 90 per cent LTV and five year tracker deals at 60 per cent and 90 per cent LTV have barely moved over the last six months.

But this research is important for a number of reasons. Firstly, it reaffirms how crucial it is for potential borrowers to obtain proper, professional advice before they make a decision.

Whether they use a broker or go direct, acquiring a mortgage is almost certain to be the most important financial decision people make in their lives. These figures demonstrate that obtaining the best value mortgage is about more than a simple interest rate – many other factors need to be taken into account.

Secondly, this data should prove useful to brokers and lenders alike. It is clear, concise and comprehensive and will enable brokers to offer proper like for like comparisons and give lenders the opportunity to work out just how competitive their products really are.

While some of the rate differentials between LTVs are significant, the continued decline in mortgage rates is obviously good news for borrowers.

But it will be interesting to see what happens to the rates when the Funding for Lending Scheme is withdrawn for residential mortgages in 2014.

I will be particularly interested to see how the five year fixed rates fair over the coming months.

If rates are to stay low for the next few years, I suspect that long term fixed mortgages will become increasingly popular.

 

 

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