Rate squeeze on first-time buyers

Lemon squeeze

First-time buyers and borrowers with small deposits are being squeezed by mortgage lenders despite a fall in the cost of lending.

While buyers looking to put down a deposit of 40% have seen a 1.86% reduction in the average mortgage rate over the past two years, those with 10% to put down are only paying 0.12% less.

Figures from data provider Moneyfacts show that in September 2007 the average two-year fixed rate cost 6.35% if you had a 40% deposit. A year later, the average rate had fallen to 5.85% and today the same loan would have an average rate of 4.49%.

In contrast, loans up to 90% of a property's value have become only marginally cheaper. In September 2007, the average rate was 6.24%, increasing to 6.63% a year later. Today, a borrower with a 10% deposit would look to pay 6.12% on a two-year fixed rate.

“Two years ago, rate-driven competition led to 90% deals being some of the most attractive rates on the market,” says Michelle Slade, spokeswoman for Moneyfacts. “Today, a 25% deposit remains the level where most lenders are willing to do business. Anything smaller than this and borrowers will pay a hefty price.”

Loans up to 75% of a property’s value have become cheaper over the past two years, with the average rate having fallen by 1.74%.

However, concern remains over the margin lenders are making on their loans. According to Moneyfacts, the cost of wholesale funding has fallen from 6.22% in September 2007, to 5.29% a year later, and 1.87% today.

This means that while average rates on loans have barely fallen, the margins have increased quite significantly.

For example, in September 2007, lenders offering 90% loans were making a margin of just 0.02%. Today, that margin has jumped to 4.25%.

On a 60% loan, the margin has also increased, from 0.13% in 2007 to 2.62% today.

“A higher margin for risk is expected on a 90% deal, but a 4.25% margin over the cost of funding seems excessive and difficult to justify,” says Slade.

She adds: “First-time buyers, once seemingly the lifeblood of the property market are now apparently being ignored as lenders continue to cherry pick lower risk borrowers. It appears borrowers searching out a new deal are paying a higher price to subsidise existing customers, many of which are paying record low rates.”

Part of the problem is that very few lenders currently offer mortgages at 90% of a property’s value – and this lack of competition means there is no incentive to reduce rates.

Richard Morea, technical manager at mortgage broker London & Country, says: “In 2007, property prices were rising, unemployment was low and the housing market was still strong. Clearly, that situation has now turned on its head, and lenders simply don’t have the appetite to offer loans at 90%.”

According to Morea, there are just five lenders offering two-year fixed-rate mortgages at 90% at the moment, with Yorkshire Bank offering the most competitive rate of 5.99%. There are even fewer offering three-year fixed rates at 90%.

However, rates are cheaper when it comes to tracker and discounted mortgages. For example, HSBC has a two-year discounted loan priced at 3.89% (plus a £1,199 fee) while Royal Bank of Scotland offers a fee-free two-year tracker currently priced at 4.69%.

  Sept 2007 Sept 2008 Sept 2009
  Average rate Margin* Average rate Margin** Average rate Margin***
Average 2-yr fixed 90% 6.24% 0.02% 6.63% 1.34% 6.12% 4.25%
Average 2-yr fixed 75% 6.4% 0.18% 5.99% 0.7% 4.66% 2.79%
Average 2-yr fixed 60% 6.35% 0.13% 5.85% 0.56% 4.49% 2.62%

Source: Moneyfacts 22/09/2009
* Margin over swap rate (cost of funding). Swap rate = 6.22%
** Swap rate = 5.29%
*** Swap rate = 1.87%