Mortgages 

Cost of risky loans shrinks amid mortgage price war

Cost of risky loans shrinks amid mortgage price war

An increased level of competition in the high loan-to-value market has led to rate slashing on higher risk products, new data has shown.

Research from Moneyfacts shows the average mortgage rate for two-year fixed policies has fallen over the past five years, with the 90 per cent and 95 per cent LTV tiers reducing at the greatest rate.

The rate of the average two-year at 95 per cent LTV has fallen by 2.08 per cent to 3.25 per cent in the past five years, while the rate of the more conventional 60 per cent has fallen by about half that figure, from 2.96 per cent to 1.90 per cent over the same period.

According to the research, this has caused the disparity of interest rates between LTV tiers to narrow.

Traditionally, "riskier" mortgages — such as subprime or high LTV — have had higher interest rates than a more standard loan, but the increased competition in the high LTV space has squeezed the difference and flattened the ‘risk curve’.

Source: Moneyfacts

This rate reduction can be attributed in part to the increasing number of products in the market, Moneyfacts stated.

The number of 75 per cent LTV products has increased more than four times from 55 to 275 in the past five years, while 90 per cent and 95 per cent products have more than doubled to 288 and 147 respectively.

Just last week Sam Woods, deputy governor for prudential regulation and chief executive of the Prudential Regulation Authority, said the price war in the mortgage market had led to lenders exposing themselves to more risk in their lending practices.

He said this included ever-increasing amounts of high LTV and loan to income mortgages alongside a fall in the capital lenders were holding to mitigate against the extra risk these products bring to their loan books.

The PRA is now considering whether there is a case to impose stricter requirements on firms to hold more capital to mitigate the trend.

Darren Cook, finance expert at Moneyfacts, said: "First-time buyers or those borrowers seeking higher LTVs seem to have benefited the most as providers appear to be competing for this business by driving interest rates down.

"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."

Danny Belton, head of lender relationships at Legal & General Mortgage Club, said increased competition had inevitably put pressure on rates as more lenders looked to increase their margins in higher LTV areas.

But he added that while some headlines may deem 95 per cent LTVs as ‘risky’, he said stress testing, loan to income ratios and current affordability rules prevented borrowers from overstretching themselves.