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

HSBC's 2.99 per cent five-year mortgage was among the first moves in the battle to attract borrowers (AP)

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.