Mortgage customers looking for 90% LTV pay twice as much

07 October 2009 / by Rachael Stiles

Those looking to get a mortgage with just 10 per cent of the property's value as a deposit could find themselves paying twice as much in interest than a buyer with a 40 per cent deposit.

Analysis from realcomparison.com has found that the size of deposit that home buyers have towards purchasing a house can make a significant difference to the interest rates they pay on their mortgage.

The average rate for a borrower with a 40 per cent deposit is currently 2.5 per cent, compared to 5.34 per cent for those with 10 per cent deposits who need a 90 per cent loan to value mortgage.

Furthermore, the analysis is based on the average best buy deal for those with small deposits – there are much more expensive deals on the market, such as a three year fixed rate charging as much as 7.04 per cent.

Those with 40 per cent of the property's value could pay £318 a month less on a £200,000 mortgage compared to someone with a 10 per cent deposit, a total saving of £3,822 a year, the figures show.

Even those who require a smaller loan to value ratio, who have 20 per cent of the property's value as a deposit, will pay an average rate of 3.25 per cent, which equates to nearly £1,000 a year more than those with larger deposits.

According to realcomparison.com, the current best buy mortgage deals for 60 per cent LTV include a two year 1.99 per cent discount mortgage from HSBC, and a lifetime tracker mortgage from First Direct at 2.79 per cent.

For those looking at 90 per cent mortgages, the choice includes a two year discount tracker from HSBC at 3.89 per cent, or a two year variable rate from Britannia Building Society at 5.34 per cent.

Borrowers in the market for an 80 per cent loan to value could choose from a two year tracker from NatWest and RBS at 2.99 per cent, or a Marsden Building Society two year discount at 3.79 per cent.

Francis Ghiloni, commercial director at realpricecomparison.com, said:  "It is encouraging that lenders are willing to lend to borrowers with small deposits but it is disheartening when you see the rates.

"With the Bank of England base rate at 0.5% borrowers could be forgiven for thinking rates ought to be lower and that there should be good deals available," but the best deals are restricted to those with significant deposits, she said, who present a lower risk to the lender.

"And the irony is that it is not necessarily the lenders who are at fault but regulatory changes which mean lenders have to price for risk and add a premium on," Ms Ghiloni added. "In reality the lender has to hold more capital in reserve for a higher LTV mortgage than for a lower one."

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