UK Help to Buy Vacuum Contributes to Mortgage Interest Rates Rise

By: MoneyFacts

Moneyfacts UK Mortgage Trends Treasury Report data, not yet published, highlights that the average two-year fixed rate at 95% loan-to-value has increased by 0.25% since January 2017, bringing the figure back to around the same rate it was a year ago.

Charlotte Nelson, Finance Expert at Moneyfacts, said:

“Back in January, the average two-year fixed rate at 95% loan-to-value (LTV) reached an historic low. Since then, the rate has shot back up dramatically, effectively cancelling out any gains made in the past year as the two-year average now approaches April 2016 levels.

“This increase to the average two-year fixed rate at 95% LTV is in part due to the current uncertainty in the market, particularly the inflationary pressures. As inflation rises, the probability of borrowers defaulting also rises, due to household expenditure being adversely affected. This makes the low rates seen previously unmaintainable.

“The 95% LTV market has also seen a significant adjustment with the removal of the Help to Buy (H2B) mortgage guarantee scheme in December 2016. The scheme provided a significant boost to the market, not only by increasing product availability but also as a catalyst for mortgage competition in this key area of the market.

“While all lenders who previously took part in the H2B scheme have since launched standard products, they are now exposed to the full risk of offering a 95% deal, which was previously shared with the Treasury. Instead of swallowing the extra cost, these providers are choosing to pass it on to the borrower in the form of higher rates.

“Providers outside the scheme had to compete fiercely with the H2B scheme, pushing rates ever lower and slowly taking on the extra risk that those in the scheme did not. As these providers are now no longer competing with H2B deals, this may be pushing rates up as well, with these lenders no longer needing to sacrifice their safety margins to remain competitive.

“The news of a rise in rates for 95% LTV mortgages is a disappointing blow to first-time buyers, as these are often considered the lifeline of the mortgage market. However, borrowers should not be too concerned, as there is still much more choice in the market than there was just a few years ago. Borrowers will just have to shop around a bit more diligently to ensure they can still get the best deal.”

The Moneyfacts UK Mortgage Trends Treasury Report, out later this month, provides an in-depth monthly review of today’s changing mortgage trends, including all the relevant facts on the UK’s residential and buy-to-let markets.

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