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Rates unlikely to drop further as margins falling and risks rising

Written by: Antonia Di Lorenzo
The interest rate premium on low deposit deals has reduced significantly over the last five years
Rates unlikely to drop further as margins falling and risks rising

Mortgage interest rates may not be able to fall much further due to squeezed margins and increasing risks at higher loan-to-values (LTVs) as lenders chase market share, according to Moneyfacts.

The average two-year fixed rates at each LTV fell over the past five years, with the 90 per cent and 95 per cent tiers reducing at the greatest rate since August 2018, Moneyfacts data showed.

The average two-year fixed rate at 95 per cent LTV rate decreased by 2.08 per cent to 3.25 per cent in the past five years, and the disparity between the average rate at 90 per cent and 95 per cent LTV has nearly halved to 0.60 per cent.

Meanwhile, the maximum 60 per cent LTV tier fell by 1.06 per cent from 2.96 per cent to 1.90 per cent over the same period.

The report found that the rate spread between the 70 per cent and 90 per cent LTV tiers has reduced from 0.46 per cent five years ago to 0.11 per cent at present, while the difference in average rate between the low-risk 60 per cent and 70 per cent LTV tiers has reduced from 0.88 per cent to 0.64 per cent over the same period.

Provider competition in the fixed rate market also found an increase in the number of products available at several LTV tiers.

Illustrating the competition, the number of products available at the 75 per cent, 85 per cent, 90 per cent and 95 per cent LTV tiers increased by 55, 70, 144 and by 73 respectively.

Flattening risk curve

Darren Cook from Moneyfacts said that first-time buyers or borrowers seeking higher LTVs seem to have benefited the most as providers appear to be competing for this business by driving rates down.

He added: “Although those first-time buyers able to raise at least a 10 per cent deposit – where the average rate now stands at 2.65 per cent – will still ultimately benefit compared to borrowers with a 5 per cent deposit, they will benefit less significantly than they would have done five years ago.

“However, today’s curve trajectory indicates that downward pressure on interest rates across most of the LTV tiers has caused this LTV risk curve to flatten, as providers seem to have sacrificed some risk by lowering rates at the higher LTV tiers in order to maintain a competitive edge.

“With the current intense competition and squeezed margins, in particular at the riskier high LTV tiers, it is unlikely that providers will be able to decrease interest rates much further. With the LTV risk curve appearing flatter, it is important that borrowers look at all appropriate LTV tiers to see if they are seeing the best product that may suit their needs.”

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