Record low rates shake-up mortgages
The big lenders have launched a pricing war, but it is still the 'cream' of borrowers who are reaping the benefits. Chiara Cavaglieri reports
Sunday 05 August 2012
A summer rate war has broken out in the mortgage marketplace. The record low for five-year fixed-rate mortgages has been broken by NatWest's new deal at just 2.95 per cent. In the past few weeks both HSBC and Santander turned heads with new 2.99 per cent mortgages and, not to be left out, Nationwide is now offering a four-year fix at 2.89 per cent.
"The pricing war continues at full pace. This latest move by Nationwide is great to see and also has a different make up, being designed over a four-year period, not five," says Ben Thompson of Legal & General Mortgages, who adds that the rate is so strong, many borrowers will consider swapping their mortgage, even if it means paying a penalty.
Borrowers who may usually prefer a base-rate tracker could also be persuaded to move onto one of these fixed-rate deals, deciding that rock-bottom rates trump flexibility. Swap rates have fallen to their lowest levels ever in recent weeks so cheaper fixed rates were expected, but these new rates have surprised the experts.
It would appear that, for once, a government scheme is having an immediate impact with some providers cutting rates ahead of the newly launched Bank of England's Funding for Lending Scheme (FLS). This initiative is intended to boost the economy by £80bn, making it cheaper for the banks to borrow money and therefore keener to lend to their customers.
But the early signs are that the extra cash is being used to tempt only the "cream of the crop". The top five-year fixes are available at a maximum 60 per cent loan-to-value and Nationwide's loan is reserved for its Flex current account holders, again with at least 40 per cent equity.
"Off the back of the FLS we have seen the release of some rates which are extraordinary but what lenders should be doing is focusing on the areas that most need help; first-time buyers, borrowers with only a 10 per cent deposit and mortgage prisoners who can't move because of changes to criteria," says Andrew Montlake from mortgage broker Coreco.
There is a chance that with this level of competition, lenders will be forced to increase their appetite for risk and lean towards better deals for homeowners with smaller deposits. In the meantime, many people are excluded. Financial comparison site Moneyfacts says that rates were reduced on more than 200 mortgages last month, but only 33 of those were made to products with loan to values of 90 per cent or more.
Even if you do have a decent deposit to offer it's important to take into account the high fees that many of these new best-buy mortgages carry. Although NatWest pipped rivals HSBC and Santander to the post in terms of rate, it does carry a colossal £2,495 fee. Not that the other two fare much better – both have arrangement fees of just shy of £1,500 – which may put you off if you are trying to keep the initial costs down. While the rate is often the top of everyone's list when shopping for a mortgage you should always consider the overall cost based on your specific circumstances.
"If you have relatively modest mortgage requirements, you might wish to think twice before opting for the market-leading rate from Royal Bank of Scotland at 2.95 per cent because of the hefty fee," says Mark Harris of mortgage broker SPF Private Clients. "For example, someone with a mortgage of £60,000 would find that the Monmouth Building Society's five-year fix at 3.99 per cent with modest fee of £195 works out cheaper over the fixed-rate period."
If you do decide to go for one of the new headline fixes, you should feel confident about locking in for the given time because if you wish to get out of it before the fixed period ends, you may have to pay a hefty early redemption charge. Two-year fixes are a cheaper option. For example, First Direct charges 2.64 per cent for up to 65 per cent LTV with a £1,999 fee, but with interest rates unlikely to rise over the next few years, fixing for a short period of time makes little sense.
"If you're happy to be tied in then why wouldn't you take the five-year option," says Mr Montlake. "You are paying slightly more for insurance but if you're not looking to move and you don't think your circumstance will change much these rates are astonishing – if I could take one, I would grab it with both hands."
Similarly, there isn't much to choose between five-year fixes and lifetime trackers, which start at a top rate of 2.64 per cent from HSBC. Lifetime trackers do tend to be more flexible because you can usually make much larger overpayments than with other types of mortgage and early redemption charges often apply for the first two years of the mortgage, or not at all as with HSBC's best buy. This can make them ideal if you earn annual bonuses and want to be able to use lump sums to pay off your loan as and when you can.
Trackers are typically cheaper than fixed-rate deals because it is impossible to predict with certainty what will happen to interest rates. So you have to gamble that you can save money now and not be caught out if rates change dramatically. With a two or three-year tracker this is clearly less of a risk, particular with expectations that base rate will remain low for some time, but lifetime tracker mortgages last for the duration of your home loan.
If you qualify for the cheapest five-year fix you are getting long-term protection from rising interest rates, and, although you don't get the same level of flexibility as you would with the tracker, most five-year fixes allow overpayments of up to 10 per cent a year, which should be enough for most borrowers.
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
- 1 Al Pacino on suffering from depression: 'It can last and it's terrifying'
- 2 Half of young women unable to ‘locate vagina’ and 65% find it difficult to say the word
- 3 Saudis risk new Muslim division with proposal to move Mohamed’s tomb
- 4 A teacher speaks out: 'I'm effectively being forced out of a career that I wanted to love'
- 5 Mexican woman becomes world’s 'oldest person' at 127
Rotherham child sex abuse scandal: Labour Home Office to be probed over what Tony Blair's government knew - and when
What do immigrants really think of Britain? Polish immigrant's Reddit post goes viral
Ashya King: Parents of five-year-old boy refused permission to visit him in hospital and denied bail at Spanish court
With Douglas Carswell joining Ukip, my party has taken another giant step forward
When elitism grips the top of British society to this extent, there is only one answer: abolish private schools
Ashya King: 'Cruel NHS has not given us the treatment we need', says father of five-year-old with brain tumour who fled to Spain
iJobs Money & Business
£600 - £900 per day: Harrington Starr: Infrastructure Lead, (Trading infrastru...
£35000 - £38000 per annum + benefits: Ashdown Group: A highly successful, glob...
£60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...
£40000 - £50000 per annum + benefits+bonus+package: Harrington Starr: SQL Impl...
Day In a Page
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony