BORROWERS with smaller deposits are finally set to benefit from cheaper mortgage rates as competition between lenders heats up.
Mortgage rates have fallen steadily since their July peak, but only borrowers with a deposit of at least 25 per cent have benefitted as lenders have sought to minimise their exposure to risk. Now the cost of mortgages with a loan-to-value (LTV) between 75 per cent and 90 per cent is starting to come down as more lenders introduce competitive deals.
Halifax is expected to cut some rates by up to 0.4 per cent tomorrow on mortgages for customers with a 5 per cent deposit, while Abbey will on Monday cut rates by 0.6 per cent on its 85 per cent LTV range and add new deals for customers with a 15 per cent deposit.
Nationwide has also cut some fixed rates up to a 90 per cent LTV, effective from today.
The reductions are the latest in a series of rate cuts, with lenders including Yorkshire Building Society, Newcastle Building Society and the Co-operative offering increasingly competitive deals on mortgages of 80, 85 and 90 per cent LTV in recent weeks.
Ray Boulger, senior technical manager at broker John Charcol, said: "A few weeks ago mortgages over 75 per cent LTV were expensive, but there is competition up to the 90 per cent market now
"Lenders are seeing where they can find a competitive niche and, with prices falling, LTV is becoming a more important factor."
The average two-year fixed rate is now 6.39 per cent, down from the early July peak of 7.08 per cent, according to financial analyst Moneyfacts. And while the mortgage market remains a long way from normality, said Boulger, borrowers now have reasons to be cheerful.
"The mood has changed since the end of June and lenders are actively competing for business rather than competing to avoid business," he said.
The developments came as Bank of England governor Mervyn King said it would continue to support lenders when it announces a successor to the special liquidity scheme (SLS) next week.
The SLS, launched in April for a six-month period, allows banks to swap untradeable mortgage securities for government debt to help shore up their balance sheets. The SLS is due to close on 21 October, but lenders have been lobbying for an extension. That has been ruled out by King, who warned that the bank would not provide long-term funding assistance.
King said: "I hope everyone will understand that the proposals to be published next week, important though they are, will not and cannot solve the shortage of funding to finance bank lending, including mortgage lending."
It is estimated that up to 200 billion has been borrowed from the scheme and Boulger cautioned that "to turn the funding tap off altogether would cause huge problems".
THIS week has brought a flurry of activity among lenders in the previously moribund 85 and 90 per cent loan-to-value (LTV) market.
At the 90 per cent LTV end of the market, Co-operative Financial Services has cut its five-year fix by up to 0.55 per cent, while Nationwide reduced several fixed rates by up to 0.3 per cent.
Yorkshire Building Society introduced cuts of up to 0.5 per cent on some of its 90 per cent LTV fixed-rate products, while HSBC reduced its 90 per cent LTV fixed rates by up to 0.72 per cent.
On Monday, Abbey is cutting rates by 0.6 per cent on its mortgages for customers with a 15 per cent deposit, reducing fees on these products by up to 1,000 and launching five new deals in the range.
It is believed that Halifax will tomorrow make further changes to its 95 per cent LTV by up to 0.4 per cent.
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