Mind the LTV rate gap

The average rate on best deals for borrowers with 40% deposits is currently 2.5% compared with an average 5.34% for those with 10% deposits. And that is the best buys for borrowers with 90% - those opting for three-year fixed mortgages will pay as much 7.04%.

Mortgage customers with a 40% deposit will pay as much as £318 a month less on a £200,000 loan than someone with a 90% deposit – a saving of £3,822 a year.

Even those who manage to raise a 20% deposit will still pay an average 3.25% which will cost them around £984 a month or nearly £1,000 more a year, analysis of the loan-to-value rate gap shows.

Current best buys across all mortgage types at 60% loan-to-value include a two-year 1.99% discount from HSBC plus lifetime trackers from HSBC and First Direct at 2.74% and 2.79% respectively.

For the 90% borrower the choice is a two-year discount from HSBC at 3.89%, a two-year variable from Britannia at 5.34% or a two-year fixed from First Active at 6.79% At 80% borrowers have the choice of a two-year NatWest or RBS tracker at 2.99% or a Marsden Building Society two-year discount at 3.79%.

Julie Speed, National Accounts Director at Evaluate Technologies said: “It is encouraging that lenders are willing to lend to borrowers with small deposits but it is disheartening when you see the rates.

“With the Bank of England base rate at 0.5% borrowers could be forgiven for thinking rates ought to be lower and that there should be good deals available. There are but they tend to be restricted to those with big deposits who are seen as a lower risk.

“And the irony is that it is not necessarily the lenders who are at fault but regulatory changes which mean lenders have to price for risk and add a premium on. In reality the lender has to hold more capital in reserve for a higher LTV mortgage than for a lower one.”

Product type - Average rate at 60% LTV - Average rate at 80% LTV - Average rate at 90% LTV

All Best Buys - 2.5% - 3.25% - 5.34%

Two-year fixed - 3.79% - 5.39% - 6.25%

Three-year fixed - 4.2% - 5.69% - 7.04%

Five-year fixed - 5.01% - 5.83% - 6.35%

All long-term - 2.82% - 4.52% - 5.32%

The analysis shows that currently borrowers opting for fixed rates are paying a substantial premium for certainty with five-year fixed rates as high as 5.01% even for those with 60% deposits.

Variable rates, discounts and trackers remain the best value across all categories. Fees across the best buy deals range from a low of £115 for a HSBC two-year fixed deal at 60% LTV to a high of £2,160 on a Manchester Building Society lifetime tracker at 4% on a 80% LTV.