Chris Sykes, associate director at Private Finance, did not disclose which lender was contemplating mortgages at this tier but said it was the first hint he had got from any lender, as others were comfortable where they were.
He said: “Although it’s somewhat approved by this lender, their big caveat is they don’t want to be the only one doing it as they don’t want to be seen as lending irresponsibly and they would be absolutely inundated.”
Borrowers with a five per cent deposit have had little mortgage choice since the pandemic struck nearly a year ago; the lender would have to absorb all the demand alone in an environment with record high property prices which are speculated to fall.
Sykes added: “Most [lenders] want to wait until furlough is over and to see the general long-term impact of Covid-19 on the economy.”
He also said any return would be slow and measured, like the relaunch of 80-90 per cent LTV deals.
“Although they’ve hinted at it, I think it will be a little while before we see it come back. It’s encouraging that this lender is actually happy to do it, but I think we’re still quite a way away from a return,” Sykes said.
Bottled up demand
Christopher Hall, mortgage adviser at Mortgage Guardian, had also heard hints of a lender reinstating 95 per cent LTV mortgages and also doubted a return would be immediate.
Hall said: “Demand for 95 per cent LTV mortgages has bottlenecked so when it comes back it will be like a champagne cork – the lender who comes back first will be overwhelmed.”
Sykes suspected the lender would restrict who and what properties it would lend on to minimise risk.
“Even if this lender did come back at 95 per cent LTV there wouldn’t be an avalanche of other lenders following suit straight away. It will be slow, maybe over a six-month period, before there’s a steady return like we see with 90 per cent LTVs now.”
Ramped up rates
Nik Mair, managing director of London Mortgage Solutions, said: “It would be amazing for the market but there are concerns around interest rates. 90 per cent LTVs are already at three per cent so 95 per cent LTVs would probably be priced at four per cent, which might put some people off.
“But I think it would still be good.”
Hall said with the Bank of England base rate at a record low of 0.1 per cent, lenders were making money “hand over fist” with mortgage pricing and product fees which were not always affordable for those on lower incomes or with smaller deposits.
He added: “There doesn’t seem to be much reward for the average working person.”
Cuts have been made across regulated and unregulated loans, but the biggest price drops apply to regulated transactions, the lender said.
Heavy refurbishment on buy to let and semi-commercial properties up to 75 per cent loan to value (LTV) are among the deals to benefit from cuts.
At the same time, Shawbrook has standardised LTV bands. The lender signaled an appetite to support the bridging market moving into 2021, in particular customers looking to take advantage of the stamp duty holiday.
Darrell Walker, head of product development and proposition (pictured), said: “We’re delighted to bring these positive changes to market and show our continued appetite to support brokers across the specialist arena.
“Having remained open for business throughout the Covid-19 pandemic, we head towards 2021 with buoyancy and confidence. The bridging market demands experienced underwriting, understanding of individual needs and a willingness to get things done, and I’m delighted to say that we tick all three boxes.”
The average five-year fixed-rate deal is now 2.91 per cent, just 0.41 per cent higher than a two-year equivalent at 2.5 per cent, according to Moneyfacts.co.uk.
The gap has shrunk from 0.64 per cent in 2016 and from 0.44 per cent in 2018, taking it to the lowest level since 2013 when it was 0.27 per cent.
It comes after a number of big lenders sliced mortgage rates in January.
Moneyfacts spokeswoman Rachel Springall said: “While economic uncertainties could potentially put off home movers this year, it is still vital that the market keeps moving, or it could cause a standstill.
“Lenders must consider their levels of risk while also keeping rates low to pull in both buyers and remortgage customers.
“As the two-year fixed market becomes saturated with cheap deals, lenders will no doubt make efforts to compete on five-year deals.
“While it is difficult to predict what the mortgage market may face in 2019, it is still positive to see the rate gap shrink, particularly for those borrowers eyeing up a five-year fixed deal who want to avoid any potential interest rate rises for some peace of mind.”
Homeowners stand to chop an average £229 a month off their mortgage interest bill by swapping an SVR for a long-term fix, Private Finance’s research showed.
If the savings were used to make overpayments, borrowers could pay off their mortgage five years earlier.
It is estimated around two million mortgage borrowers have been on SVR rates for six months or more at an average rate of 4.33% paying a typical £620 of interest each month.
By comparison the average 10-year fixed rate is 2.73% with monthly interest of £391.
Shaun Church, director at Private Finance (pictured), said: “Borrowers lingering on their lender’s SVR will find themselves subject to much higher than average interest rates.
“When it comes to mortgages, it pays to be proactive, so swapping to a new deal as soon as the initial offer ends is recommended.
“Our analysis shows the savings from doing so can run into tens of thousands of pounds over the course of a typical mortgage term, making it well worth the effort.
“Ten-year fixes offer a decade of immunity from future rate rises for a relatively affordable price, as the price gap between shorter and long-term fixes has been narrowing in recent years.
“Although taking on such a long commitment won’t be for everyone, borrowers looking to ensure financial stability for the foreseeable might well be tempted to switch to a 10-year deal.”
The base rate has an impact on the cost of mortgages, but it can also shape the approach of brokers to their clients.
We asked this week’s Marketwatch panel how they feel about the prospect of rate rises and whether it should or could change relationships with customers?
James McGregor mortgage adviser at Mesa Financial Consultants
With interest rates rising recently it does create a lot of unnecessary noise in the industry.
When advising clients as many variables as possible should be taken in to account, but mainly we advise on clients’ personal circumstances, and not market circumstances.
It is impossible to guess future trends, as most economists prove.
I do not believe a rising environment should be a sole reason to change your approach on advice with clients.
This should have already been a point to discuss with clients and what happens to their circumstances if interest rates do rise.
The biggest problem in the country at the minute is consumer credit and not mortgage interest rates increasing.
Having said this, there are great opportunities for the advisory market when there is uncertainty.
This is when clients need most help and guidance.
We sent an email to every single client that was affected by the rate rise to arrange a meeting and discuss the consequences of the rate increase and how we can manage the risk of future increases.
So I believe it is essentially a good thing for the mortgage market as a whole, as long as it is managed correctly.
Rachel Lummis, mortgage adviser at Xpress Mortgages
We are so used to a low interest rate environment, back in 2005 when I started out as a mortgage adviser the base rate went up to 5.75% before plummeting to the lows we see today.
Moving the BoE base rate from 0.5% to 0.75% in itself, is moderate but it is only the second rise in a decade, so it is significant.
The general belief is we are moving to a higher rate environment and rises will remain modest but more frequent.
Because of the lower interest rate environment and competition among lenders we have seen rates as low as 1%.
Even the higher LTV rates have significantly reduced, much to the delight of first-time buyers who, with rising house prices, have struggled to get on to the housing ladder.
The concern now is, if rates do indeed rise steadily, what will be available when customers get to the end of their fixed rate and need to remortgage to a new product to avoid reverting to their lenders much higher standard variable rate?
For those that got a low fixed rate, the expectation is that low rates won’t be available next time around and to prepare for a possible hike in monthly mortgage payments.
Anyone coming to the end of their deal, needs to be prepared and organised, the search for a new rate should start at least six months prior to the existing rate ending.
The two options to explore, remortgage or do a product transfer with the existing lender.
Preparation is key, if indeed we are in a rising rate environment.
Chris Schutrups, managing director at the Mortgage Hut
Following the interest rise in August, which markets priced in as an almost certainty at 90% chance, we have seen very little change within the market itself.
Consumers are more aware of the chances of interest rates rising, with more borrowers opting to choose longer term fixed rates, such as five years.
Interest rate rises do create more conversations and discussion with clients about the future of the economy and what they see as the bumps in the road.
However, the overall sentiment is that people are not particularly worried that interest rate rises that could affect their affordability when it comes to mortgages.
I think most consumers are thinking about the Brexit negotiations that are happening at the moment and a no deal situation does offer some concern to them.
Coupled with interest rate rises, it does mean that people take a longer term view on how they might fix their mortgage payments.
With inflation running at 2.5%, slightly higher than Bank of England governor Mark Carney would probably like, we may see further interest rate rises down the line later this year.
Overall both the consumer and the economy have been very resilient with referendums, Brexit votes and various other bumps in the road that have happened.
The next 12 months will be interesting but I don’t think many people know exactly how this is going to turn out.
Research from Moneyfacts has revealed that as two-year fixed mortgage rates continue to rise, five-year fixed rate mortgages look more appealing.
Borrowers looking for a mortgage now may be unsure of whether to choose a traditional two-year fixed rate deal or opt for the security of a longer-term fix, according to Charlotte Nelson, finance expert at Moneyfacts.co.uk.
It comes as the average two-year fixed rate has increased from 2.35% at the start of the year to 2.52% this month.
Meanwhile, the average five-year fixed rate has been rising at a much slower pace, having increased by just 0.05% since January, Moneyfacts data showed.
Nelson added: “This has narrowed the gap between the two products dramatically.
“Although the sharp increase in the average two-year fixed rate can be predominately explained by base rate uncertainty, providers also play a part, as they look to shore up their mortgage book ahead of any future rises by the Bank of England.
“Specifically, lenders are hoping to entice borrowers onto a longer-term option by keeping their five-year fixed rate deals competitive, which is why the two-year fixed rates have sped up but the five-year rates haven’t.
“Borrowers seem to be just as eager to secure their future, as many are moving away from the traditional two-year fixed rate deals, with remortgage demand for five-year fixed rates increased to 47% – almost half of the remortgage market.”
Based on the average fixed rates, it would only cost a borrower £40.87 more per month if they were to opt for a five-year deal instead of a two-year option, according to Moneyfacts.
Nelson added: “This is great news for borrowers looking for long-term security, however, with five-year fixed rates starting to creep up this may not last forever.
“Borrowers considering a deal should act fast to ensure they do not miss out on the best possible products.”
The online survey examined consumer attitudes to mortgage rates by asking borrowers their awareness of how their current rates compare to the best rates – and compared awareness rates to a survey conducted in 2010.
With awareness defined as being fully aware, or aware of but not in detail – the results found that 66% respondents in the 2017 survey were aware of how their current mortgage rate compared against the best rates in the market.
In comparison, the 2010 survey found that 39% of homeowners were cognisant of how their rates stacked up against market-leading rates.
The 2017 results also showed that 77% of 55-75 year olds said they were aware, compared to 62% of 35-44 year olds.
However, only 42% of 16-24 year olds were aware of mortgage comparisons.
Occupations
Moreover, respondents with a higher education qualification were more likely to have knowledge of how their rates compared against top market standards, with 71% of those with higher education qualifications having knowledge of the comparisons, against 43% of those who have had no formal qualification.
Furthermore, the survey showed how those with full time employment were more likely to have mortgage rate knowledge than those without: 68% of working respondents were aware, against 56% of those unemployed.
Compared to 2010, 50% of respondents in full time employment were aware, compared to 26% of those out of work.
Peter Savage, chartered financial planner at Fairstone commented: “It is positive and very encouraging to see the rise in market awareness, perhaps improved by greater use of online comparison tools and with interest driven by the strong residential property market of the past decade.
Savage continued: “Regardless of age or qualifications we would urge all those with mortgages or those seeking one, to get the help of an independent financial adviser or specialist mortgage broker who will be able to guide the decision-making process and ensure the best arrangement for their client.”
The 2017 research was carried out by Ipsos MORI on behalf of Fairstone, using sample of 2,200 adults aged 16-75 in Great Britain weighted to known population profiles.
The 2010 ICM Worker’s Life Planning Survey sampled 18+ adults in Great Britain through 2003 nationally representative interviews.
Oxford Economics lead economist Martin Beck suggests lenders may simply absorb the increase in borrowing costs thanks to higher spreads between commercial borrowing rates and the base rate.
Fewer homes are on variable rate mortgages, compared to a decade ago, so the affect on households will be muted, Beck predicted.
The Bank of England this week raised the base rate 0.25% to 0.5%.
In a research note, Beck wrote: “To the extent that the Monetary policy Committee’s (MPC) rise in Bank Rate translates into higher commercial borrowing costs, the effect will be softened by changes in the structure of the mortgage market.”
Lenders also removed some of their cheapest fixed rates in the weeks leading up to anticipated increase, meaning the rate hike could already be largely priced in.
But some critics believe mortgage rates are now set to jump in the coming months.
Samuel Tombs from Pantheon Macroeconomics predicted five-year mortgage deals will rise by around to 50 basis points to an average 2.4% over the next six months.
On the 4 August, Santander, Barclays and Virgin Money passed the full 0.25% cut to SVR customers. However, Moneyfacts.co.uk data suggests across the market, average SVRs have only dropped 0.9% since before the move.
Plenty of lenders, including Lloyds, have passed the full cut to variable and SVR customers, after Bank Governor Mark Carney’s warning to do so, with Teacher’s Building Society announcing its 0.25% cut today.
However, Carney launched the Bank’s four-year Term Funding Scheme (TFS) as part of a package to support ongoing lending in the face of ‘profitability compression’ after the rate cut, making excuses harder. The shape of the scheme was finalised on 17 August.
The 2.2m existing borrowers on tracker mortgages have benefitted the most from the Bank of England move with two-year trackers falling from an average of 2.13% on 1 August to 1.94% today. However, average two-year fixed rates for new applicants are only 0.3% more competitive.
Charlotte Nelson, finance expert at Moneyfacts.co.uk, said: “While the picture for borrowers isn’t bleak, it is definitely a mixed bag. Borrowers would have assumed that a 0.25% cut in base rate would make them financially better off, particularly if they were on a variable rate.”
She added: “The average two-year tracker rate has been reduced by 0.19%, so borrowers looking for this type of deal would have seen a better picture. However, shockingly some providers, preempting the announcement, chose to increase their variable rate products, meaning the reductions have been offset.”
In mid-August, Lloyds raised its tracker rates 0.25% for remortgagors and purchasers in a move called ‘unwarranted’ by brokers.
Halifax hikes tracker rates in ‘unwarranted’ move following base rate cut
Ahead of the Bank of England’s announcement, a number of mortgage lenders also appeared to pre-empt a reduction to the base rate, with Natwest, Halifax, TSB, Coventry Building Society, Santander, RBS and Scottish Widows Bank all increasing rates on their variable tracker deals, according to Moneyfacts data.
After the Brexit vote on 23 June, in a package of credit support, the Bank’s Financial Policy Committee boosted lending capacity for providers by £150bn after a £5.7bn reduction in capital liquidity buffers which it wanted targeted to keep UK lending stable.
