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Small deposit mortgages see fastest rise in interest rates

Written by: Shekina Tuahene
Mortgage lenders favour first-time buyers with larger deposits, as rates rise for those who need to borrow most
Small deposit mortgages see fastest rise in interest rates

The rise in cost of a two-year fixed rate for first-time buyers with the biggest deposits has been much slower than for those with less capital to put down, analysis from Moneyfacts has shown.

The average two-year fixed rate for a first-time buyer (FTB) borrowing 95 per cent of the property’s value has risen 0.05 per cent to 3.28 per cent since September.

However at 90 per cent LTV, the average FTB two-year fix rose by 0.01 per cent to 2.65 per cent.

The average rates at 95 per cent LTV had returned to the same level as six months ago, while at 90 per cent LTV they were 0.02 per cent higher.

Rate differentials

The difference between the two rates in October stands at 0.63 per cent.

In contrast, the average two-year fixed rate at 60 per cent LTV decreased by 0.04 per cent to 1.80 per cent and was 0.11 per cent lower compared to April.

And at 75 per cent LTV, the drop was 0.02 per cent to 2.32 per cent.

Darren Cook, finance expert at Moneyfacts, said with 95 per cent LTV rates rising faster than any other tier, it was likely the gap between the two higher LTV tiers “could widen in the coming months”.

Cook said: “It appears that mortgage providers may be factoring in a larger proportion of default risk into rates at higher LTVs, where, among other things, competition and lower wholesale funding costs seem to be benefiting borrowers with a greater equity stake in their property.

“The difference in average rates between 90 and 95 per cent LTVs has historically always been greater than differences in average rates between LTVs lower down the tier scale, so it is always worthwhile for a potential FTB to try to raise an additional deposit and attempt to step down the ladder to find a mortgage at lower interest rates.”

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