UK mortgage rates have dropped across major high street banks, sparking a price war and offering fresh hope for first-time buyers. Lenders such as HSBC and the Co-operative Bank have cut rates in response to changing expectations on UK interest rates.
Mortgage Price War: HSBC and Co-op Bank Cut Rates as Halifax and Lloyds Ease Rules
The UK mortgage market is experiencing a price war, with major lenders such as HSBC and the Co-operative Bank announcing fresh rate cuts. This move comes in response to the financial turmoil sparked by ‘US trade tariffs’ and changing expectations on UK interest rates.
Mortgage rates are influenced by economic indicators such as inflation, 'the key driver of interest rates' , employment rates, and GDP growth.
The Federal Reserve's monetary policies also impact mortgage rates.
Generally, lower mortgage rates increase demand for housing, while higher rates reduce it.
As of 2023, the average 30-year fixed mortgage rate in the US is around 6.5%.
Factors like credit score, loan term, and property type can affect individual mortgage rates.
The Rise of Low-Deposit Mortgages
A recent surge in low-deposit mortgages has hit a 17-year high, with Moneyfacts reporting that the number of deals allowing buyers to borrow up to 95% of a property’s value has increased. This development is particularly good news for first-time buyers, who often struggle to amass a significant deposit.
Low-deposit mortgages allow homebuyers to purchase a property with a deposit as low as 5%.
These mortgages are also known as low-deposit loans or low-equity mortgages.
They are designed for first-time buyers who may not have enough savings for a larger deposit.
Low-deposit mortgages typically require mortgage insurance, which protects the lender in case of default.
According to data from the UK's Financial Conduct Authority, 63% of new mortgages issued in 2020 had loan-to-value ratios above 80%.
This trend highlights the growing demand for low-deposit mortgages among homebuyers.
Lenders Step Up the Competition
Several major lenders have announced rate reductions in recent days, including Barclays, which became the first ‘big six’ lender to cut its mortgage rates below 4%. The Co-operative Bank has also relaunched its mainstream and buy-to-let mortgage ranges with reduced rates for new two- and three-year fixed deals. Other lenders, such as Gen H, have followed suit.
Relaxing Affordability Rules
At the same time, several leading lenders have relaxed their affordability rules, making it easier for borrowers to secure a mortgage. The changes made by Halifax, Bank of Scotland, Lloyds Bank, and BM Solutions mean that a typical household applying for a mortgage could potentially borrow £38,000 more, thereby making it easier ‘to turn their dream home into a reality’.
Affordability rules are guidelines that determine whether a borrower can afford to repay a loan.
These rules consider factors such as income, debt-to-income ratio, credit score, and loan amount.
The Federal Housing Administration (FHA) has established affordability rules for mortgage loans, requiring borrowers to spend no more than 31% of their gross income on housing costs.
Additionally, the total debt-to-income ratio should not exceed 43%.
Lenders use these guidelines to assess a borrower's creditworthiness and ensure they can repay the loan.
Increased Borrowing Power
The Financial Conduct Authority has recently stated that the way some lenders were doing stress tests ‘may be unduly restricting access to otherwise affordable mortgages‘. The Lloyds Banking Group brands are lowering their stress test rates with immediate effect, which could result in typical customers seeing increases of about 13% in the maximum loan available.
For example, a couple with two dependant children and a total household income of £75,000 may have previously been able to borrow a maximum of £286,000. However, under the new rules, this amount could increase to £324,000.
- theguardian.com | HSBC and Co op Bank cut mortgage rates as Halifax and Lloyds ease rules
