Tumbling mortgage rates signal lenders’ ‘low risk’ strategies

Tumbling mortgage rates signal lenders’ ‘low risk’ strategies

Low rate mortgages have seen another product join their ranks as Halifax introduced the UK’s lowest two-year fixed rate at 0.83 per cent for large deposit holders.

Halifax’s product is only available to borrowers with a 40 per cent deposit on loans of up to £1m, cutting off smaller deposit holders who carry more risk.

It also unveiled a record five-year fixed rate at 0.98 per cent for large deposit holders last week.

Rather than stoking the ongoing ‘rate war’ to the bottom, brokers say the record reductions are a sign of lenders’ persistent appetites for low risk business. 

"What this really tells us isn't that lenders are wanting a rate war, more that lenders are as keen as mustard to get super low risk business on their books,” explained Lewis Shaw, founder of Shaw Financial Services.

Shaw reckons the tumbling rates on lower loan-to-value mortgages were a result of the government scheme launched earlier this year to stimulate 95 per cent loan-to-value lending, which he said lenders’ “hands [were] forced into”.

Introduced in April, the scheme focused on high street lenders such as Lloyds - Halifax’s parent, Santander, Barclays, HSBC, NatWest, and Virgin Money.

The government's mortgage guarantee scheme does secure a portion of the high-risk mortgage, but Shaw’s point implied such efforts to minimise the risk of a default for lenders did not go far enough.

Specialist lenders, meanwhile, have praised the government scheme for balancing the sheer volume of mortgage applications from first time buyers and other small deposit holders.

"The government scheme has alleviated demand on smaller lenders," Newcastle Building Society's chief customer officer, Stuart Miller, told FTAdviser in June

The diversion of higher risk business to larger lenders has prompted reports of certain mortgage applicants being discriminated against.

Some lenders, for example, are refusing to accept self-employed borrowers who took out Covid grants. 

Mortgage Broker Tools' latest data shows the average maximum loan size available to a self-employed applicant in July was £221,000 – a fall of more than 5 per cent on June and the lowest level since February.

But whilst lenders’ record low deals on interest rates do seem appealing for those who fit the criteria, they come with a price.

“Halifax is about the only high street lender still charging for a basic valuation, which means that for many people the cheapest deal overall often lies elsewhere,” said Rhys Schofield Peak Mortgages and Protection’s managing director.

“As ever, these headline grabbers often come with significant set-up fees.”

Schofield reckons Halifax’s latest mortgage launch will spur further cuts. “Where the UK's largest mortgage lender goes, others will surely follow.”

But others anticipate rates rising before long. "These rates are unlikely to be around for long and there is not much room for them to get any lower so it really is worth considering fixing your rate for a longer period,” said Robert Payne, director at Langley House Mortgage.