In recent years, the UK mortgage market has seen a change: the difference in mortgage rates for those with large deposits versus those with smaller ones is getting smaller. This trend means that while having a big deposit can still get you a better rate, the financial advantage isn’t as significant as it used to be.
Data analysis shows this narrowing gap in clear terms. For instance, the difference in repayment amounts for a £200,000 mortgage between someone with a 40% deposit and another with just a 10% deposit could now be as little as £61.
Looking back a few years, the scenario was different. In 2022, a buyer with a 40% deposit could get a five-year fixed rate of 1.98%, significantly lower than 2.93% for a 10% deposit. The gap was even wider the previous year. However, this difference has steadily reduced over time.
Current Trends in Mortgage Rates
As of now, the average rate for a five-year fixed deal with a 40% deposit stands at 5.06%, compared to 5.65% for a 10% deposit. Similar trends are observed in two-year fixed deals.
Initially, the expectation was that rate differentials would widen with increasing rates. However, the opposite occurred, with the average gap falling significantly since 2021.
Chris Sykes from Private Finance suggests that this trend might be a strategic move by lenders to support borrowers with smaller deposits, especially targeting the first-time buyer market.
A Closer Look at Loan-to-Value Dynamics
Loan-to-value (LTV) ratios play a crucial role in determining mortgage rates. LTV is essentially the percentage of the property’s value that is mortgaged. Rates vary for different LTV levels, typically at 90%, 75%, and 60%.
David Hollingworth from L&C Mortgages points out that traditionally, a smaller deposit meant a higher rate due to increased lender risk. This trend has remained, but the differential in rates across LTV bands has narrowed.
In recent times, lenders have shown increased competition for lower-risk borrowers while also trying to be competitive in higher LTV bands. This approach has led to a squeezing of margins and a reduced gap in rates across different LTV bands.
Even among those with larger deposits, the trend remains consistent. The rate differential between 25% and 40% deposits has also seen a reduction over the years.
Hollingworth believes that this trend of narrow differentials is likely to continue, with a robust range of lender and rate choices across different LTV bands.
Implications for Remortgaging Households
This trend is equally relevant for those looking to remortgage. As homeowners build equity and improve their LTV ratio, they traditionally could access cheaper deals. However, the rate discount for improved LTV is now less significant than before.