Typically, 95% fixed rates are priced around the 5% mark whereas the average standard variable rate is 4% – shielding them from the pressure of the first 1% rise in the Bank rate.
Boulger said: “A common criticism of those who don’t believe anyone should be allowed to buy a home without a deposit in excess of 5% is the risk of default when interest rates rise. This demonstrates a failure to understand some of the dynamics of the market.
“Therefore, if a 95% borrower takes a fixed rate most are in effect insulated from the first 1% rise in Bank Rate, whereas a borrower with plenty of equity taking a sub 2% 2 year fix risks a sharp rise in payments in two years’ time.”
Boulger highlighted that the interest rate stress test, stipulated in the Mortgage Market Review and already implemented by many lenders, adds an extra layer of protection against rate volatility.
He added: “Couple this with the probability that the value of most homes will rise by at least 6% over the next two years, in this eventuality the LTV would come down to 85% after only two years.
“A reduction of even 5% in the LTV would allow the borrower to remortgage to rates around 1% below 95% rates and a 10% reduction to 85% LTV would mean rates a whole 2% lower, based on current rates.”
Boulger said that due to the anticipation house prices will rise in the next two years, he said two-year fixed rates might make sense for high LTV borrowers, although lenders may not allow roll-up fees at that LTV.
He added: “For borrowers with a larger deposit, or more equity, five-year fixed rates are still available under 3%, even at 75% LTV.
“The differential between two and five year fixed rates, particularly after amortising over just two years, is relatively small when considered in the context of buying interest rate security for two years, when it is not really needed, or five years.”
The uncertainty over what will happen to rates in the future, despite the expectation they will rise slowly, makes five-year fixed rates the attractive choice for lower LTV borrowers, said Boulger.
“Even those who are not comfortable being locked into early repayment charges for five years don’t need to miss out. Coventry offers a five-year fixed rate at 3.39% up to 65% LTV with no ERCs and a below average fee of £499.”
