It hasn’t been since 2008 that we have seen such huge variances in the best mortgage rates (circa 1%), vs the rates on offer on high loan to value (LTV) mortgages (3%+). So we re going to look at why we currently find mortgage pricing at a premium in a bit more detail. Why that has happened, what it means for rates going forward, and why it is ultimately a good thing! But let’s starts with some basics:

How does mortgage pricing work?

The answer to that question is a blog in its self. Luckily, here is one we did earlier. For the purposes of this blog, we’ll focus on the two main levers that determine pricing:

  • How much is your home worth vs the amount you wish to borrow (the Loan to Value – LTV – so £750k loan vs a £1m property is 75% – this is complicated stuff, you are going to need to keep up…)
  • The borrowers profile (level of income, type of income, past credit conduct, residency status etc)

Both are crucially important as that ultimately determines the level of risk to the mortgage lender.

In a very simple example – if a client had a history of not paying their bills, but had conducted themselves well for the last year or two, there are many lenders who will offer them a mortgage, but they may insist of a larger deposit of 25% or more.

Equally, a lender may be happy to offer a loan to someone who has just a 5% deposit, but they’ll want to ensure they have a squeaky clean credit profile.

So pricing is determined by that relationship – the larger deposit you have, the lower the rate, or the more risk a bank is willing to take. The smaller deposit you have, the higher the rate and the less risk a bank wants to take. That is an extreme simplification, but it is the principal mortgage lending runs on.

Why is the deposit so important?

This boils down to risk the lender takes – if you stop paying your mortgage, they need to take the property back to recoup their loan – so the level of deposit (or equity) in the property is the biggest factor in whether a lender will make a loss on your loan if that happens. That is why lenders will take more risks when you have a magic 25% (+) in the property, as house prices have never gone down by more than 25% in any one cycle. That means their risk of making a loss greatly reduced.

There is also another key factor in how mortgages are funded. Lenders have to abide by ‘Capital Adequacy Ratios’, which simply means for every £ they lend, they need to keep £x aside (roughly about 8%) in case loans go bad or the market turns.

The higher the LTV, the higher the % of capital needed, meaning it sucks up a lot of cash if you want to start lending to people at 85/90/95% of the property value. Hence why this is the preserve of the large banks as they can afford to do that and smaller lenders struggle.

This also explains why some lenders are pulling back from lending to the self employed or those in deemed ‘high risk sectors’ such as hospitality etc. As even if the lender can offer a high LTV loan, but your role is seen as risky, some lenders are shying away from those with less than a 25% deposit. Thankfully not all lenders, as options are there, but you would be surprised at how few in some situations.

That is all well and good, but why are 90% (+) mortgages so “expensive”?

It’s true that the disparity of the best mortgage rates (1.04% at the time of writing) to the most expensive 90% deals (4.04% for the most expensive High Street lender at the time of writing – the best being 3.24%) is very high, and rarely do you ever see such a large difference.

Also when you factor in the UK Base rate is at 0.1%, it does start to look “expensive”. But as the long term average for the UK Base Rate over the last 150 years or so has been 5%, the word expensive should be used carefully.

Just ask anyone who had a mortgage in the late 1970’s where rates topped out at 17%! That was just the UK Base rate so a mortgage rate would have been circa 18%… eye watering stuff.

There is a very short answer as to why lenders are pricing their loans this way – because they can.

As so few lenders are offering 90% mortgages (just 21 lenders, covering 97 products according to Twenty7Tec – the mortgage sourcing company) the lenders that can, and are willing to charge a premium for the pleasure.

The amount of offer on choice is also hugely up from last year, as at the lowest point, only 5 lenders were offering 90% products. As more lenders are coming back to this section of the market, pricing is coming down, but that will take some time to filter out. If you take the point above on house prices, it won’t be until we are well out of the woods with Covid before you see this part of the market reach normality again.

Should you wait until mortgage pricing comes down?

Depending on your situation that could be a sensible move as currently we find mortgage pricing at a premium. As explored above, if you have a 25% + deposit/equity, it is pretty much business as usual so no need to wait. If you have less than this it can get more complicated.

In a simple example:

  • If you are looking to buy for the first time or move.
    • What’s the risk if you do wait?
      • Will you have to keep throwing money away on rent?
      • Are you stuck at home getting under your parents feet?
      • What if house prices shoot up again (prices went up circa 8% last year and you will do very well to save above that rate to just keep pace with the market)
    • What are the upsides?
      • I house prices dip this year and you can cash in on a lower rate and cheaper property?
      • If you are in a family/friends home, or your living costs are very low, you may save up a larger deposit and get a better rate
      • If your work situation is uncertain it may be prudent to ride out this period before committing to a mortgage


  • If you are looking to refinance, should you hold off?
    • Much the same as the above, but just consider:
      • If I do nothing what rate will I be charged? Most lenders variable rates are 4% + in any case
      • Could you take a penalty free rate which may be a bit higher now, but if rates dip in a years’ time you can cash in?
      • Do I plan to move in the next few years? If so, what product will suit me best to achieve that?
      • If I need extra money, should I refinance the whole loan, or just take a top up loan? If you do this, just the ‘top up’ will be at a higher rate

So we see why we currently find mortgage pricing at a premium. As ever, nothing is straight forward with mortgages and just highlights why quality impartial advice is so important. If you have any questions on the points raised here, or any mortgage goal that you may have, please do pick up with one of the team who would be delighted to help.

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