A mortgage price war has broken out between lenders – but borrowers with big deposits or large amounts of equity in their property are the main winners. So although the number of mortgages on the market has hit a nine-year high, and average rates have fallen to new lows across the board, many househunters are still missing out on the most cost-effective deals.
The mortgage market is in a very different place than it was in 2008, before the financial crisis hit. Lenders today are much more risk-averse, and reserve their best deals for borrowers with the most savings to use as a deposit or the greatest amount of equity in their house.
They do this by setting a maximum loan-to-value (LTV) for each product. The LTV ratio is calculated as the amount you want to borrow as a percentage of the value of your property. For example, if you had a deposit or equity equivalent to 40% of your property’s value, and consequently needed to borrow 60% of its value as a mortgage, your LTV would be 60%.
Having a lower LTV will mean a far greater choice of products in today’s market. In March 2008, just 24 products were reserved for borrowers with a maximum LTV of 60%, according to the Moneyfacts UK Mortgage Trends Treasury Report. Today, that number stands at 549 of the 4,460 mortgages on the market. By contrast, back in 2008 there were 575 deals available at 95% LTV; today there are just 257 on offer. It seems that 60% LTV is “the magic level to access the best rates, although some lenders have even introduced 50% LTV bands”, says Mark Harris of mortgage broker SPF Private Clients.
Being able to access these low LTV deals will have a significant effect on how much your mortgage costs. As an example, those borrowing at 60% LTV will be eligible for what is currently the cheapest fixed rate available. That’s Yorkshire Building Society’s two-year fix at 0.99% per year, with a £1,495 fee. Conversely, the best two-year rate for those borrowing at 90% LTV is 1.65%, with a £995 fee, from Monmouthshire Building Society. Someone with a £250,000 mortgage repayable over 25 years would pay £941 a month on the Yorkshire deal, and £1,018 a month with Monmouthshire.
If these rates remained unchanged over the 25-year term, that would amount to a significant difference of around £23,000. Consequently, buyers who have substantial amounts of spare cash that is not earning much interest should consider increasing their deposit – or paying off part of their existing mortgage – in order to be able to access deals in a lower LTV band. Just make sure that you keep enough cash back for emergencies as it can be hard to access this money again by refinancing, particularly at short notice.
Admittedly, few people will have the money or equity to push their LTV ratio to the extremes of 60%. But if you are just shy of a 10% deposit, dropping into the next bracket down can still make a big difference. Using the same example as before, a 95% two-year fix from Aldermore Building Society (with set-up fees of £1,808) would cost almost £470 more per month than if you were going with Monmouthshire’s 90% offering.
Finally, it’s worth appreciating that if the value of your house rises, and your borrowing level stays the same, your LTV will fall over time, and you’ll have access to better deals when you remortgage. If you borrowed £80,000 to buy a property worth £100,000, your LTV would be 80%. However, if the value of your house then rose to £120,000, a loan of £80,000 would put your LTV at 67%, giving you a much wider choice of loans when you remortgage.