In a fresh twist to the mortgage market’s topsy-turvy year, lenders have started cutting fixed rates again.
With interest rates tipped to rise in early 2016, homeowners have been rushing to fix their mortgages.
That led some of the absolute cheapest mortgage rates to be pulled, as banks look to squeeze a little more from borrowers.
Yet, rate rise forecasts have drifted out again and money market borrowing costs have eased, leading to a flurry of new mortgage rate cuts.
On the rise: The return of rising house prices has given lenders more confidence
The path mapped out for interest rate rises is a gentle upward curve, yet borrowers should consider that rates are forecast to be rising in two year’s time and so those taking shorter term fixed rates will need to bear in mind that costs when those deals end are likely to be higher.
For those with the largest deposits – of about 35 to 40 per cent – it is possible to fix for five years below 2.5 per cent and for two years at below 1.2 per cent.
At the benchmark 25 per cent deposit mark, five-year fixed rate mortgages hover at about 2.5 per cent, while two-year fixes stand at about 1.3 per cent.
For some those may feel too short or too long, but a five-year fixes at below 2.5 per cent might look a very tempting middle ground.
What is happening with rates?
The prospect of an interest rate rise was pushed into the distance by low inflation, slowing world growth, the oil price slump, the eurozone’s continuing woes, and lots of other things that keep central bankers awake at night.
Thanks to all that, homeowners were served up the opportunity to take out some very cheap mortgages.
The mood seems to have shifted for interest rates though.
Hints are being dropped by Bank of England officials that its ratesetters will have to start considering raising interest rates at around the start of 2016.
As an interest rate rise draws closer, banks and building societies will face slightly higher costs for their own funding on the money markets and with demand for fixed rates high, they are likely to start raising rates.
Can you get a mortgage?
Banks and building societies have broadly got to grips with the tougher new mortgage rules introduced in April 2014. These produced a marked slowdown in lending and home sales but transactions have now risen back towards the level they were at previously.
Getting a mortgage is tougher though.
You will need to get your finances in order and be prepared for the lengthier application process and in-depth affordability interviews getting a mortgage requires nowadays.
Weigh up the above, check the rates below and in our best buy tables, have a scout around what the best deals look like – and speak to a good independent broker if you need help deciding.
There are a couple of things to look out for if you do decide to take a cheap fix up.
You need to check the bumper arrangement fees are worth paying – if you don’t have a big mortgage you may be better off with a slightly higher rate and lower fee.
It’s wise to also think carefully about whether you expect to move home soon. A good five-year fix should be portable, so you can take it with you.
But your new property will need to be assessed and you might need to borrow extra money, and so your lender could still say no.
Getting out of a fix typically requires a hefty hit to the pocket from early repayment charges.
Today’s low rates may stick around, they may even inch a little lower, but they may also be swiftly axed.
Fix vs tracker: where are the best rates?
should have a quick look at the rates below, these are regularly updated by This is Money’s mortgage product specialist Marc Shoffman. If you spot a deal you think has been pulled or should be in there, email him via email@example.com with mortgage rates in the subject field.
For a fuller rate check use This is Money’s mortgage finder service and best buy tables,
these are supplied by our independent broker partner London &
Country. When dealing with any broker, remember some lenders will not
usually be included as they do not pay commission, some of these such as
HSBC and First Direct consistently offer top rates, so check
First Direct has a five-year fixed rate at 2.19 per cent with a £1,450 fee.
HSBC has a five-year fixed rate at 2.19 per cent with a £999 fee.
Cumberland building society has a rate of 2.24 per cent with a £699 fee.
Metro Bank has a five-year fixed rate at 2.29 per cent with a £999 fee.
West Brom has a rate of 1.19 per cent with a £999 fee.
HSBC has a two-year fixed rate at 1.19 per cent with a £1,499 fee.
Post Office Money has a rate of 1.15 per cent with a £1,995 fee.
Mid range deposits
First Direct has a five-year fixed rate at 2.48 per cent with a £1,450 fee.
Post Office Money has a five-year fixed rate of 2.49 per cent with a £1,495 fee.
HSBC has a five-year fixed rate at 2.54 per cent with a £999 fee.
Chelsea Building Society has a rate of 1.39 per cent with a £1,675 fee.
Tesco Bank has a rate at 1.49 per cent with a £1,495 fee.
Norwich & Peterborough has a two-year fixed rate of 1.44 per cent with a £1,295 fee.
Leeds Building Society has a two-year fixed rate at 1.65 per cent with a £1,999 fee.
First Direct has a two-year rate at 1.68 per cent wit ha £1,450 fee.
First Direct has a five-year fixed rate at 2.63 per cent with a £1,450 fee.
Nottingham Building Society has a five-year fixed rate at 2.64 per cent with a £999 fee.
TWO VS FIVE-YEAR FIXED RATES
The margin between five-year and two-year
fixes has trimmed but a shorter fix remains cheaper.
However, at the end of a two-year fix you will move onto a lender’s more expensive standard variable rate, most of which could rise any time and many certainly will when rates go up.
Be warned you may
end up coming off a two-year fixed rate as rates are rising. The Bank of England and markets indicate the first rise will be in early 2016, after which rates are expected to step up to a cycle peak of 2.5 to 3 per cent. This is why This is
Money prefers five-year fixes.
However, if you think you will move in
that period you may face large early repayment charges if your mortgage
cannot go with you.
15 per cent
Yorkshire Building Society has a two-year fixed rate of 1.84 per cent with a £975 fee.
First Direct has a two-year fixed rate at 1.79 per cent with a £1,450 fee.
HSBC has a five-year fixed rate at 2.79 per cent with a £999 fee.
First Direct has a five-year fixed rate at 2.89 per cent with a £1,450 fee.
10 per cent
HSBC has a two-year fixed rate at 2.19 per cent with a £1,495 fee.
The Co-op has a two-year fix at 2.24 per cent with a £1,499 fee.
Tesco Bank has a two-year rate of 2.29 per cent with a £1,495 fee.
HSBC has a five-year fixed rate at 2.99 per cent with a £1,499 fee.
Coventry Building Society has a five-year fix at 3.35 per cent with a £999 fee.
5 per cent
The Government has launched a Help to Buy guarantee scheme that provides an indemnity of up to 15 per cent for lenders to allow them to offer mortgages for a 5 per cent deposit.
Halifax is offering a fee-free two-year fixed rate at 4.29 per cent or for five years with a 4.89 per cent fee.
Lloyds Bank is offering a two-year fixed rate at 4.39 per cent under the Help to Buy mortgage guarantee scheme with a £995 fee or 4.99 per cent with no fee.
HSBC has a two-year fixed rate at 3.79 per cent with no fee.
Virgin Money is offering a fee-free two-year fixed rate at 4.59 per cent, a three-year fix at 5.09 or five-year fix at 5.14 per cent.
These mortgages come with £300 cashback.
Santander has a 4.29 per cent two-year fix or 4.89 per cent for five-years. The deals have a free valuation and £250 cashback.
Barclays offers fee-free rates of 3.99 per cent for two years or 4.75 per cent for five years. .
Post Office Money has a two-year fixed rate at 4.15 per cent, a three-year deal at 4.48 per cent and a five-year rate at 4.85 per cent. All have no fees.
There are also 5 per cent deposits available outside of Help to Buy that can work out cheaper.
Yorkshire Building Society has a two-year fixed rate at 3.78 per cent with a £975 fee.
Tesco Bank has a two-year fixed rate at 3.89 per cent with a £495 fee.
Hinckley & Rugby building society has a two-year rate at 3.95 per cent with a £999 fee.
Furness Building Society has a two-year fixed rate at 3.99 per cent with a £199 fee, only available in-branch.
Tesco Bank has a five-year fixed rate at 4.49 per cent with a £495 fee.
Chelsea Building Society has a five-year rate at 4.69 per cent with a £1,675 fee.
Hanley Economic Building Society has a five-year fixed rate at 4.69 per cent with a £250 fee.
Tracking a 0.5 per cent base rate
that is only likely to rise may seem an odd decision when you could fix
for up to five years at a lower rate, however, there is one big
advantage to a good lifetime tracker – flexibility.
fixed rate mortgage will almost inevitably carry early repayment
charges, you will be limited as to how much you can overpay, or face
potentially thousands of pounds in fees if you opt to leave before the
initial deal period is up. You should be able to take a good fixed
mortgage with you if you move, most are portable, but there is no
guarantee your new property will be eligible or you may even have a gap
A good lifetime tracker has no early repayment charges, you can up sticks whenever you want and that suits some people.
at a low rate looks good now, especially when rates are not predicted
to go up for the next three and not rise substantially over the next
five years, but that may not turn out to be the case, so make sure you stress test yourself against a sharp rise in base rate.
Chelsea Building Society has a two-year tracker at 0.98 per cent with a £1,675 fee.
First Direct has a lifetime tracker at 1.99 per cent with a £950 fee for those with a big 40 per cent deposit.
HSBC has a lifetime tracker rate of 2.39 per cent with a £999 fee for a 25 per cent deposit.
For a smaller deposit, First Direct has a lifetime tracker deal at 2.98 per cent with a £950 fee for a 10 per cent deposit.
- A note on changing rates: Our mortgage rates round-up is kept regularly updated. We do not simply pick the absolute lowest rates but instead scour the market for the best overall deals, using a combination of rates, fees and other extras. Rates can change on mortgages at short notice and sadly lenders do not always inform us when they alter them (especially if they raise rates rather than lower them). This can lead to occasions when the rates listed above are not available. If you ever spot this situation – or a good rate we have not listed – please email firstname.lastname@example.org with mortgage rates in the subject line and we will update the round-up asap.
WHAT WAS FUNDING FOR LENDING?
The BoE lent cheap money to banks who then passed this on to borrowers with its funding for lending scheme.
and building societies could access finance at rates from around 0.75% –
far cheaper than the equivalent money market rates or what they must
pay to attract savings deposits – rates on savings accounts tumbled in
response to this.
able to borrow up to 5% of their existing lending stock, and for every
£1 of additional lending made by a bank, it was able to access an extra
£1 of cheap funding from the scheme.
That source of new funding from extra mortgage lending has now been switched off
Funding for Lending allowed banks to swap
assets such as existing loans with the Bank of England for up to four
years in exchange for gilts, which they can then use to borrow money for
their lending at close to base rate.
They paid a small fee to access the scheme, of 0.25 per cent per year.
This will remain the same if they keep grow net lending or keep it
stable. If they shrink it the fee will rise by 0.25 per cent for every 1
per cent decline in net lending up to a maximum of 1.25 per cent.
The price of each bank’s borrowing in the Scheme depended on its net lending between 30 June 2012 and the end of 2013.
Banks could borrow up to 5% of their existing lending stock, and for every
£1 of additional lending made by a bank, they were able to access an
extra £1 of cheap funding from the scheme.
The way the scheme was set up means that with base rate at 0.5 per cent
banks could access funding at a rate of just 0.75 per cent and even if
they shrink net lending they will not pay more than 2 per cent for it.
Should you get a new mortgage? And what to get?
Certainly, those on standard variable rates of 4 per cent or higher with reasonable equity in their home should seriously consider moving. They have two main options.
One option is a fee-free, early repayment charge free, life-time tracker. This could shave money off their monthly repayments – or leave them equal – and ensure their rate will only rise when base rate does.
Many could grab a fix and pay less than they are now.
If you are on an SVR you should seriously think about moving, unless you have a Nationwide / C&G-style guarantee capping it at a certain level above base rate – even then you may now be able to save money.
Events have highlighted the vulnerability of standard variable rates and discount rates linked to them, with Santander’s rise following mortgage giant Halifax raising its SVR, along with Bank of Ireland, Co-op and Clydesdale/Yorkshire Banks. RBS also raised rates for 200,000 borrowers with Offset and One Account mortgages.
Unlike standard variable rates, which are at the mercy of bank’s whims, trackers will only move up if the base rate rises.
Why fix for five years or track for life?
At This is Money we have typically favoured five-year fixes and lifetime trackers over two or three year deals.
The first give a good rate and security over a medium term period for those who want it, the second should allow borrowers to leave without incurring early repayment charges.
By contrast two or three year deals have slightly lower rates but will incur more remortgage fees and require borrowers to be looking around for a new mortgage just as rates may be starting to rise.
That said two-year fixes are offering some extremely low rates at the moment – and so could be worth a look, however, you must make sure paying fees makes them worth it.
The gap between a top five-year fix and a best lifetime tracker has substantially narrowed
Five-year fixes are cheap money locked in for a decent term and very tempting, but make sure you read the small print – ensure it can move home with you if needed – and compare costs including fees to see what is best for you.
Safety first or take a gamble
Locked in: A five-year fix offers the security that your payments will not rise.
The appeal of a five-year fix to both buyers and remortgagers is the longer term security it gives and that there is no need to remortgage in a short period of time, when rates are likely to be higher.
Homeowners should check that deals they are looking at are portable, and can therefore go with them if they move home.
Never forget the pay rate on trackers will rise when the base rate does.
The bigger margin on fixed rates means that borrowers willing to take a gamble on rates rising slowly are being tempted by tracker rate mortgages.
Those happy to take a punt on rates rising slowly can save money over time by opting for a tracker,but they need to be comfortable with the risk of higher payments and factor in a decent safety margin when working out future mortgage costs.
Big fees vs rates
The best rates require big fees, but in most instances, fee-free or low-fee options are available and that highlights how vital it is for borrowers to work out if a big fee-low rate mortgage is worth it for them.
Typically, the bigger your mortgage the more worthwhile it is paying a large fee, although watch out for those that are a percentage of your loan.
A brief guide to what decides rates
Mortgage rates and savings rates are part of a complex financial web that draws on official lending costs, ie base rate, money market funding costs, and competition for savers’ deposits.
The traditional influence on fixed rate mortgages over the past decade has been swap rates [latest on swap rates], the cost of obtaining fixed term funding on the money markets for lenders.
Meanwhile, the traditional influence on tracker rates over the same period has been Libor, the cost of floating rate funding on the money markets.
Banks use savings deposits to fund mortgages as well as money market borrowing, while building societies are heavily limited in how much of the latter they can use.
This means fixed savings rates are also influenced by swap rates, while instant access savings are influenced by variable interest costs – base rate and Libor.
How the financial crisis changed things
Typically money market costs tended to move in line with the Bank of England’s base rate, with Libor about 0.1 per cent above it and swap rates reflecting what the market thinks interest rates will be over a set period of time, ie two years, five years etc.
The credit crunch put paid to this relationship temporarily, but things then returned almost back to normal.
Generally, a rise in Libor or swap rates will push up mortgage costs and a fall will allow lenders to cut them.
But mortgage lenders’ levels of confidence and their access to funding are equally important to rates. Things were pretty tight here for quite some time after the financial crisis and that kept rates relatively high.
The pick-up in the property market and the economy, along with a healthier outlook for banks and building societies has boosted confidence. Rates are now at exceptionally low levels but mortgages are harder to get than they once were.
Lending is a long way off the easy credit days of pre-2007 – and rightly so.
Choosing a mortgage – the essential quick guide
1. How big a deposit do I need?
To get the full choice of deals raising a decent deposit is still vital. The benchmark figure is 25 per cent, if you have this then you’ll be getting close to the best rates, although for an absolute cheapest deal you’re still likely to need 40 per cent.
However, things are looking up for homemovers and first-time buyers who can’t raise that hefty quarter of a property’s value. A selection of better deals for 15 per cent deposits are available and even the 10 per cent deposit market is looking perkier.
2. Should I take a fixed rate?
Borrowers face a tough decision on this, as fixed rates still remain comparatively expensive by comparison with tracker deals. That leaves the big question: when will interest rates rise?
The consensus is that there will be no dramatic sudden increases. However, these forecasts are no guarantee that rates won’t rise and when rates rise trackers will get more expensive. [Remember almost no one forecast base rate heading down to 0.5 per cent]
Borrowers needing security should consider the extra cost of a fix as worthwhile. If you are taking a tracker because you couldn’t afford the equivalent fixed rate then you are putting yourself in a very dangerous position.
3. Should I take a tracker rate?
Tracker rates look good right now. They are cheaper than fixes but they should come with a massive warning sign attached, as essentially they are a gamble.
What looks like a bargain rate now, could soon get very expensive when interest rates rise.
Anyone considering a tracker needs to make sure they are not just storing up a problem for the future. If the tracker comes with an early redemption penalty that would make it expensive to jump ship, then make sure your finances could take a rise of at least 2 per cent to 3 per cent in interest rates.
For that reason we at This is Money like tracker deals that fit into one of these three categories: no early redemption penalties, a cap to how high the rate will go, or that let you jump ship for a fixed rate if rates rise.
4. Should I get off a standard variable rate?
Standard variable rates are what borrowers slip onto by default when they finish a fixed or tracker deal period.
They can typically be changed by lenders at any time – without the Bank of England moving rates, they may also rise or fall by more than any move in base rate.
A number of mortgage borrowers have fallen victim to lenders hiking their standard variable rates in recent years, despite the base rate remaining stable.
Never forget than without a Nationwide-style base rate lock guarantee, your SVR could be hiked at any time, as could a discount rate linked to it.
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