Mortgage trends in 2021: Loan products and 95% LTV offers

• How much can I borrow to get on the property ladder?
• Paragon Bank launches new extra-large loan product
• Martin Lewis urges people to take advantage of the Lifetime ISA to boost deposit savings
• Mortgage complaints in the UK rocket as banks penalise homeowners

National averages on fixed-rate mortgages have declined again this week, bringing them near the lowest levels of 2021.

According to mortgage buyer Freddie Mac, the benchmark average on 30-year fixed-rate mortgages in the US has fallen below 3% – the lowest level since early March.

In the UK, the availability of 95% loan-to-value (LTV) mortgages has surged over the past month, as competition between lenders increases.

Buyers are also keen to take advantage of the 95% LTV and lower interest rates, which has helped many get a foot on the property ladder.

However, with so many new products and deals available, prospective buyers may be wondering: How much can I borrow, and what factors will influence the mortgage rate I’m offered?

What is a mortgage, and how can I increase my chances of getting onto the property ladder?

A mortgage is a loan acquired from your bank or building society to help you purchase a property.

As with any loan, lenders will charge interest on the monthly payments, and if you fall into arrears, you run the risk of having your home repossessed by the bank or building society.

When applying for a mortgage, you will be asked to provide your income, outgoings, financial history, information concerning whether you have any dependents and future spending plans.

The lender will use this information to conduct an affordability assessment to determine whether they are happy to offer you a loan. Banks and building societies will also conduct stress tests to decide whether you’d be able to cope with mortgage repayments if the interest rate rose.

Lenders will provide finance based on the property’s worth, known as the loan-to-value, the remainder you will be responsible for paying.

So, if you want to purchase a GBP 200K home with a 90% LTV, the mortgage lender would loan GBP 180K, and you would need to provide the rest.

How do mortgage lenders determine affordability?

Banks and building societies will combine the income of those applying or assess the ability of a single borrower on the application to repay.

Under most circumstances, borrowers can receive finance for up to 4.5 times their income, meaning if you earn GBP 50K a year, you could receive a loan of up to GBP 225K, which would be double if more than two people making the same amount are applying for the loan.

How much deposit do I need for a mortgage?

While saving a larger deposit will help reduce your monthly repayments, the availability of 95% LTVs has increased as we emerge from the COVID pandemic, and many buyers can now secure mortgages with as little as a 5% deposit.

Again, lenders will use comprehensive criteria to assess whether they believe you can afford the monthly repayments. With a 95% LTV mortgage, buyers can secure a property worth GBP 200K for GBP 10K.

With competition between lenders heating up, a new 0.95% fix set is also due to launch next week.

Platform launches market-beating 0.95% fixed-rate deal

On June 2nd, the intermediary arm of the Co-Operative Bank, Platform, is expected to launch a new 0.95% two-year fixed option with a 60% LTV.

Although the deal will come with a substantial GBP 1,499 fee, borrowers will also receive GBP 250 cashback.

Mortgage broker Private Finance suspects the new deal will only be available to borrowers with an impeccable credit history. However, Platform is launching other options next week and lowering interest rates on existing products “to support buyers within all stages of the housing ladder”, says Fred Sharp, director of mortgage distribution at The Co-operative Bank.

From next week, a three-year fixed-rate mortgage at 80% LTV will be on offer at 2.65% with no fees and GBP 1,000 cashback, as well as a five-year fixed 90% LTV at 3.35% with a GBP 999 fee and GBP 250 cashback.

Platform’s 95% LTV announcement comes after Hinckley and Rugby Building Society launched a two-year 0.99% variable-rate loan to remortgagers with 40% equity and TSB announced a two-year fixed 99% mortgage at 60% LTV.

That said, as both come with exorbitant upfront costs, borrowers may be able to make savings by looking elsewhere.

Steep competition has now spurred other lenders, such as Paragon Bank, to introduce new products and lower rates to appeal to borrowers.

Paragon Bank launches extra-large loan products

The UK-based bank, Paragon, has cut rates across a range of its buy-to-let (BLT) portfolios and introduced two new extra-large loan options with lower rates and a flat product fee.

Paragon Bank is now providing a two-year and five-year fixed-rate option for re-mortgagers and new buyers of single self-contained (SSC) properties (accommodation with facilities that have been constructed for the exclusive use of those living within the property).

The new SSC mortgages will be available at 70% and 75% LTV for portfolio landlords that rent out property through their name or a limited company.

For the 70% LTV two-year fixed option, rates start at 2.95%, rising to 3.34% on the five-year fixed mortgage, but both products come with free valuations and cashback offerings.

Rates start at 3.20% for the two-year fixed 75% LTV mortgage, increasing to between 3.30% and 3.65% for the 5-year fixed-rate products.

Although the extra-large loan products come with a larger GBP 10K flat product fee, Paragon Bank said that “despite seeming extortionate at first glance, it offers portfolio landlords financing properties worth up to GBP 2M with fantastic value for money.”

The lender also noted that after speaking with brokers, they discovered that flat fees are attractive for these particularly high-value purchases and re-mortgaging.

Their approach to supporting investors and the property market comes alongside news that Virgin Money has launched an abundance of new products to encourage customers to make “greener” choices and purchase energy-efficient new builds.

Virgin Money encourages buyers to purchase energy-efficient new builds

On May 27th, Virgin Money launched an array of new mortgage options for first and next-time buyers to encourage “greener” buying.

The financial services brand offers two and five-year fixed-rate mortgages on homes with an Energy Performance Certificate rating of A or B in support of Britain’s transition to net-zero emissions.

Virgin Money will reward customers that choose more energy-efficient new builds with tree planting, renewable energy funding and lower interest rates, which start from 1.25%.

For standard residential mortgages, the two-year and the five-year fixed-rate option are available at 65%, 75% and 85% LTV, while the Help to Buy equity loan products start range from 55% and 75% LTV.

Mr Hugh Chater, Virgin Money’s chief commercial officer, said: “We want to give our customers the chance to make a greener choice in their finances.”

The availability of mortgage offerings has increased since UK Chancellor Rishi Sunak launched a government-backed 95% mortgage scheme, which has allowed borrowers from a range of backgrounds to step onto the property ladder.

It has been beneficial for self-employed workers, who have historically faced more challenges due to having inconsistent earnings.

Self-employed workers can access low-deposit deals

Self-employed workers often run into more challenges than full-time employees when applying for mortgages due to having to prove earnings.

Depending on the type of work completed, self-employed workers may have gaps in their earnings. However, this should not be a deterrent as it is still possible to secure your dream home even if you don’t have a permanent job role.

Experts note that one of the biggest misconceptions about applying for a mortgage while being self-employed is that lenders will require a 50% deposit, but this is false.

Lenders will offer contractors and freelancers a range of competitive deals to make it easier for you to get onto the property ladder, especially if you are a first-time buyer.

Contractors can also take advantage of shared ownership mortgages, which tend to have lower upfront fees as borrowers start by purchasing a share of the property.

Instead of taking out a traditional mortgage, borrowers acquire shared ownership through a housing association and pay rent on the portion of the property that they cannot afford to mortgage.

The affordable homeownership scheme, also dubbed part-buy part-rent, is only available to first-time buyers, existing shared owners and existing homeowners who cannot afford to take out a mortgage for a new property.

As you co-own your home with a housing association, you will pay rent to that organisation until you own 100% of the property.

However, Money Saving Expert, Martin Lewis, warns against applying for these schemes, noting that rapidly increasing house prices will raise the costs for borrowers.

When buying shares of your home under the shared ownership scheme, the cost of your new share will depend on how much your property is worth at that time. Given that housing prices increased by 7.5% in the year to January 2021, the cost of share could increase significantly.

Mr Lewis noted that Britain’s housing market is already “highly stimulated” due to government support measures such as the Help to Buy Equity Loan Scheme and stamp duty cuts.

Martin Lewis also warned that the idolisation of homeownership, which has driven up property prices, has now made it even more difficult for younger people to get on the housing ladder.

Instead of signing up to schemes like shared ownership and seeking low-deposit mortgages, Mr Lewis said Brits could boost their savings by taking advantage of the Lifetime ISA, which allows you to save up to GBP 4K a month and receive a 25% government bonus.

The hesitancy he expressed over new mortgage deals and government schemes come alongside data published by the Financial Ombudsman Service (FOS), revealing that mortgage complaints have surged by more than 50% over the past year.

According to FOS, there were 11,835 complaints about mortgages in the last 12 months, driven by unsatisfactory statements about residential mortgages.

The top three complaint categories were first-charge repayments, first-charge interest-only and second charge repayments, with contract terms and variable rates proving to be a significant source of criticism.

Furthermore, many homeowners who went to their banks for help during the height of the COVID pandemic are now being punished by lenders for taking out COVID mortgage holidays with higher interest rates and other measures.

However, lenders are demanding that the UK government resolve the issue and help borrowers struggling to pay their mortgage due to the impact of COVID-19.