Chelsea's record-low, fixed-rate mortgage deal could spark a new price war

Just when borrowers thought good times in the mortgage market were coming to an end, a surprise, new offer could spark another price war.

Chelsea Building Society is offering a five-year, fix-rate deal at an all-time low rate of 3.19 per cent.

The offer, which massively undercuts competitors in the five-year market, is available to borrowers below 70 per cent loan-to-value (LTV) – as long as they first pay a hefty arrangement fee of £1,495.

"The fee aside, this is the lowest-priced, five-year, fix-rate mortgage deal we have ever seen. It signifies a fresh battle in the mortgage marketplace," said Andrew Hagger from Moneynet.

"Based on a 25-year mortgage term, the new Chelsea five-year fix is the top deal as long as you borrow more than £117,000 – anything below this figure then you're financially better off with the Co-operative Bank, courtesy of its 3.59 per cent rate (to 75 per cent LTV) with no product fee," Mr Hagger added.

Since its takeover of the Chelsea and Norwich & Peterborough building societies, the Yorkshire Building Society has been keen to grab market share. The record low, five-year deal should be seen in this context, according to David Hollingworth from the broker London & Country.

But regardless of the reasoning, the Chelsea offer reverses a recent trend for mortgage price rises.

"Over the past few weeks we have seen some fixed and flexible-rate mortgage rates rise by 0.2 or even 0.3 per cent. These rises reflect the fact that of late lenders are having to pay more to borrow money on the open markets crucial to funding these deals due to the worsening eurozone crisis," Mr Hollingworth said

Michael Ossi, a personal finance expert at comparison site uSwitch.com, hopes that the Chelsea offer prompts a renewed price war.

"Hopefully this will cause an increase in the number of five-year, fixed deals on the market, giving those looking for security more choice.

"The increased competition in this part of the mortgage market could also lead to a further fall in fees and rates for longer-term fixed mortgages, meaning those who want to budget and prepare for an increase in rates won't be too heavily penalised."

But Mr Hollingworth reckons Chelsea's headline rate may be as low as any borrower goes.

"First Direct may come in with something competitive... but I reckon as far as rates go I can't see a five-year fix coming in much cheaper than this," he said.

However, although Chelsea's offer is cheaply priced, it doesn't mean a fix is right for everyone.

"Bank of England base rate, currently 0.5 per cent, is likely to stay very low for the forseeable future. Therefore, it may be wise to look at the range of base-rate trackers out there at the moment.

"If you can find one, say 2 per cent above base rate, that represents quite a decent saving over even the Chelsea five-year fix," Mr Hollingworth added.