Dealing with high mortgage rates - and the return of 100% LTV deals

Stubbornly high inflation has seen mortgage rates rise again when many people were hoping they’d fall, but meanwhile the return of no-deposit mortgages have boosted first-time buyers.

There has been more pain for homeowners in the UK amid fears that higher inflation will prove stickier than anticipated. Although CPI inflation fell from 10.1% to 8.7% in April, the drop was not as steep as the Bank of England had forecast, fuelling expectations in the market that the Bank will need to increase interest rates further to accelerate the fall in inflation back to its 2% target.

The majority of mortgage borrowers are on fixed-rate deals, 1.8 million of which are scheduled to end in 2023, according to UK Finance. Many have been delaying sourcing a new deal for as long as possible in the hope that mortgage rates will fall. However, last month saw mortgage rates rise once again after the Bank of England increased the base rate by 0.25% to 4.5%, a record-breaking 12th consecutive rise, and market speculation grew of more increases to come.

With the average Standard Variable Rate (SVR), which is the rate you revert to after the current deal with your mortgage lender ends, sitting at 7.37% in May (compared to 4.78% in May 2022), falling onto this rate while you wait for new deals to become cheaper could prove very costly in the interim period.

Somebody with a £200,000 25-year mortgage who is currently on a 2.61% fixed deal, which was the average two-year fixed rate for borrowers with a 60% loan-to-value (LTV) in May 2022, will see their repayments increase by £553 per month if they fall onto a 7.37% SVR when their deal ends.

Keeping your options open

One solution which people are turning to is to take advantage of a tracker rate with no early repayment charge. A tracker mortgage means your interest rate could change in any given month should the Bank of England change the base rate. If the Bank increases the base rate by 0.25% again this month, for instance, the interest you pay on your mortgage will rise by 0.25%.

For borrowers with an least 25% equity in their home, there are tracker mortgages currently available under 5%. By opting for a mortgage with no early repayment charge, you can exit the deal with the lender and take a deal with a different lender at any stage without being penalised.

“Given that it is now expected to be longer before interest rates start coming down, we are recommending these tracker mortgages to people who don’t want to tie themselves into a fixed rate and then regret it in six months,” says Marie​ Dalrymple, equity release and mortgage specialist at Ascot Lloyd. “If you have a decent LTV then there are plenty of rates available which are not much more expensive than the cheapest fixed rates currently on the market.

“Every month that goes by, there are more and more people whose current deals are coming to an end. There comes a point where you can't wait anymore, particularly if you will soon fall onto an SVR of 7 or even 8%, so a tracker mortgage with no early repayment offers a much more attractive rate which also gives you the flexibility to switch again when cheaper deals emerge.”

Rent trap

Of course it isn’t only existing homeowners who have been hit by high inflation but first-time buyers too. The cost of living crisis has made it harder than ever to save a deposit to purchase a home. After the financial crash in 2008, mortgage lenders made it mandatory to put down a deposit of at least 5% when purchasing a home. The most recent figures from the ONS showed that the average UK house price is now £285,000, which would need a deposit of over £14,000.

Meanwhile average rents have increased by 11% in the last year, according to Zoopla, which along with sky-high household energy bills has made it even more difficult for renters to save the money to buy their own home. The number of English households renting privately has doubled since 2000 to 4.6 million, according to Skipton Building Society, which found in a recent study that four in five tenants feel “trapped” in a rental cycle that prevents them from saving a deposit.

To help break the rental cycle, Skipton has become the first lender since the 2008 financial crash to enable buyers to borrow up to 100% of a property’s value with no guarantor required. The ‘Track Record Mortgage’, which offers a five-year fixed rate of 5.49%, is only available to first-time buyers aged 21 or over who have been in rented accommodation for at least a year.

Aware of the risks

Skipton will lend up to 4.49 times your annual income, so to purchase a house for £200,000, for instance, your income must be at least £44,544 (or joint income if buying as a couple). You must have no missed payments on debts or credit commitments in the last six months, and prove that you've paid rent and all household bills for at least 12 months in a row, within the last 18 months. If you are buying as a couple, you must have been renting together for the last 12 months or have been renting individually for the last 12 months and covering all household bills.

“First-time buyers currently face numerous factors which make it tough to get on to the housing ladder,” says Dalrymple. “Being trapped in renting is one of the UK's biggest housing challenges and it’s having a massive impact on a whole generation. There has been a huge gap in the market for people who have a solid history of making rental payments and can evidence affordability of a mortgage, so it’s very welcoming to see a High Street lender break away from the pack and introduce a great opportunity for trapped renters who aren’t able to save a deposit.

“It’s important, of course, to be aware of the risks of a 100% mortgage, most importantly if your property goes down in value you could go into negative equity which will make remortgaging very difficult and if you need to sell for any reason you could end up owing the lender extra money. We are happy to provide advice on whether this product could be suitable for you. It could be just the opportunity you or a member of your family need to get on the property ladder.”

Taking on a mortgage is a big life decision and remortgaging can be confusing. At Ascot Lloyd we source products from the whole of the market, with access to advice and special rates which are not available direct. Get in touch to find out how we can help.