The mortgage batttle led rates to continue their downward slide this week, with multiple deals now available at less than 0.9 per cent interest.
Halifax launched the lowest two-year fixed rate ever seen at just 0.83 per cent on Monday, and now HSBC has responded with the lowest rate in its own history at 0.89 per cent.
The two-year fixed rate incurs a £999 arrangement fee and, as with most of the ultra-low interest deals currently on the market, is only available to home movers or those remortgaging with at least a 40 per cent deposit or equity.
This has led to questions over how much further rates can fall. Brokers are divided on the answer, with some suggesting they could go to 0.5 per cent and others saying they won’t go much lower. We take a look at the market and speak to the experts.
Bottoming out? Mortgage rates are hitting historic lows of less than 0.90 per cent
Two-year deals are the lowest rate battleground, with those 0.83 per cent and 0.89 per cent deals on offer, but many borrowers are increasingly attracted by the idea of fixing for five years.
HSBC also launched a sub-1 per cent deal on a five-year fixed rate for such borrowers, at 0.99 per cent with a £999 fee.
With rates so low, those coming to the end of a fixed-rate term should be able to secure a competitive deal, provided they have a substantial deposit and a good credit rating.
Brokers say that, in some circumstances, it may even be worth customers exiting a fixed-term mortgage early and paying the early repayment penalty in order to snap up a super-low rate.
But the lowest rates don’t always represent the best deal, as they often come with hefty arrangement fees.
This is Money explains what borrowers need to know about rates across the market right now, and what to check if they are considering a mortgage switch.
Why are rates so low?
Banks and building societies are awash with cash to lend, as middle-class savers paid in huge amounts during the pandemic when they couldn’t spend on going out or holidays. Most savers are earning pitiful interest on it, generating a cheap funding opportunity for lenders.
Lenders are also competing with each other for new customers, as they shrug off fears of house price falls and instead chase the boom in purchases seen during the pandemic. Some are keen to grab business now for fear appetite for borrowing may fall away after the stamp duty holiday was tapered down at the end of June.
‘This is being exacerbated by the transaction cliff-edge at the end of the stamp duty holiday, which prompted many to go through sooner,’ says Matt Coulson, director at Heron Financial. ‘Banks want your business and will be making decisions to win it.’
HSBC is the latest lender to launch an extremely low-interest deal, offering a two-year fixed rate of just 0.89 per cent. However, it is only available to those with 40 per cent deposits
The Bank of England base rate is also sitting at a historic low of 0.1 per cent, and set to stay that way for some time.
While mortgage rates are not tied to the base rate, they usually rise and fall with it, as it dictates the cost at which banks can borrow money.
Finally, banks are keen to get more low-risk business on their books by lending to those with bigger deposits.
This effectively balances out the riskier 5 per cent deposit mortgages they have been offering – with substantially higher interest rates – at the other end of the scale.
Not all can grab a super-low rate but some go sub-1%
Though interest rates are falling across the board, they still vary widely across the market.
While those with 40 per cent deposits are getting very cheap deals, first-time buyers with just 5 per cent to put down can still pay interest rates as high as 4 per cent, for example.
Below if roughly how the best deals break down outside the 20 per cent-plus deposit or equity bracket.
20 – 30 per cent deposits
While not as low as those with 40 per cent deposits, mortgages for those with 25 or 30 per cent deposits are now edging closer to the sub-1 per cent bracket.
Platform is the only lender to have gone sub-1 per cent for those with 25 per cent deposits so far, offering a two-year fixed rate of 0.99 per cent with a hefty £1,249 fee.
HSBC also launched a five-year fix for those with 25 per cent deposits at 1.19 per cent with a £999 fee – the lowest rate available on those terms.
At the 20 per cent deposit level, the lowest rate available is Platform’s 1.49 per cent with a £749 fee on a two-year fix, while the cheapest fee-free option is Marsden BS’s 1.85 per cent.
Those with 25 or 30 per cent deposits to put down could now find that they have access to rates less than 1 per cent, though most come with large arrangement fees
5-15 per cent deposits
If you have a 15 per cent deposit then you will still get a highly competitive rate, albeit some way off the best.
Rates jump significantly for those with deposits of 10 per cent, typically first-time buyers.
Halifax has the lowest rate on a two-year fix at 2.19 per cent, though with a £1,199 fee. The cheapest fee-free option is NatWest’s 2.48 per cent on a two-year fix.
Those with smaller deposits wanting to fix for longer will need to pay closer to 3 per cent interest, but this could be worth it as they won’t need to pay the costs of switching again in two years’ time.
The lowest rate available for a 10 per cent deposit on a five-year fix is HSBC’s 2.79 per cent with a £999 fee, while the cheapest fee-free deal is Atom Bank’s 2.99 per cent, which also comes with £500 cashback.
Five per cent deposit borrowers will need to pay over 3 per cent interest.
Atom Bank offers the lowest two-year fixed rate at 3.09 per cent with a £900 fee, and also a fee-free deal with 3.39 per cent interest and £500 cashback.
Beware: Fees can cancel out an ultra-cheap rate
As the above examples show, all of the attention-grabbing low-interest deals charge significant arrangement fees – so these need to be factored in to the total cost of the mortgage.
Once borrowers add the fee in to their monthly payment, the deal may not be as cheap as it first seemed.
Don’t use the low rate as a bragging right, as that could hit your back pocket hard
‘What people need to bear in mind is the lowest headline rate deals aren’t always the best deals,’ says Paul Neal of brokers Missing Element Mortgage Services.
‘Most have a product fee added, which can be up to £1,499, making a 1 per cent-plus mortgage product the cheaper option.
‘We would always recommend you seek advice and don’t use the low rate as a bragging right, as that could hit your back pocket hard.’
Count the cost: Arrangement fees get lower if the borrowers pays a higher interest rate
There are also broker’s fees and valuation costs to consider in some cases. For example, Halifax’s super-low 0.83 per cent rate is only available via selected brokers, who may or may not charge a fee.
Halifax also charges for a basic valuation – one of the only large lenders to do so.
‘The Halifax are about the only high street lender still charging for a basic valuation, which means that for many people the cheapest deal overall often lies elsewhere,’ says Rhys Schofield, managing director at Peak Mortgages and Protection.
|Provider||Interest rate||Fee||Annual cost|
|Platform||1.26%||£0 (£250 cashback)||£8,272|
To illustrate how fees can affect the overall cost of a mortgage, we took the example of a borrower buying a £300,000 home with a 40 per cent deposit of £120,000, so a total mortgage amount of £180,000.
On Halifax’s 0.83 per cent interest mortgage, they would pay £8,725 per year on a two-year fixed term.
But if they took Halifax’s slightly higher-interest deal at 0.87 per cent, they would actually pay less per year at £8,613, because the deal has a lower arrangement fee.
Raymond Boulger, senior mortgage technical manager at broker John Charcol, says: ‘Halifax’s 0.83 per cent, two-year fix will only be the cheapest deal for anyone borrowing at least £600,000.
Halifax’s 0.83 per cent mortgage will only be the cheapest deal for anyone borrowing at least £600,000
Raymond Boulger, John Charcol
‘Those borrowing less than who want a two-year fixed rate would be better off with an alternative two-year fix from Halifax which has a rate of 0.87 per cent, but a fee of £999.’
The total annual cost could be even lower if they chose a deal with no upfront fee. By doing this, the borrower in our example could save more than £450 a year compared to Halifax’s super-low deal.
Whether or not a higher-interest deal would save a buyer money depends on the amount of their mortgage, so it is important to check based on individual circumstances.
We also examined the annual costs for a buyer purchasing the same £300,000 home with a 25 per cent deposit, again on a two-year fixed term.
Again, the lowest-interest mortgage – Platform’s 0.99 per cent product – came out the highest based on the annual cost.
The buyer would be £130 per year better off if they chose HSBC’s mortgage at a much higher interest rate with no upfront fee.
|Provider||Interest rate||Fee||Annual cost|
Will rates stay low and should borrowers hold out?
With rates changing so quickly, mortgage borrowers considering a switch will want to know two things: how low rates could potentially go, and when the tide will turn and they will begin to rise.
Unfortunately, there is no simple answer to either of these questions.
This is Money asked mortgage brokers how low they thought rates could go, and there was little consensus.
In a quick straw poll, almost half said they thought that rates for those with lots of equity would bottom out at between 0.75 and 0.79 per cent, just slightly lower than where they are now.
Buying spree: The pandemic housing boom has helped to lower rates, but brokers admit there is no knowing how long these cheap mortgage deals will stick around for
However, almost a third said they would fall to 0.69 per cent or lower, with one even predicting that they could go as low as 0.5 per cent.
In the more conservative camp is Hina Bhudia, partner at Knight Frank Finance.
‘It may be the case that we see some more very marginal cuts, but 0.83 per cent or thereabouts is likely to be as low – or close to as low – as they’ll go in this cycle,’ she says. ‘For buyers that qualify, now is the time to lock that rate in.’
Bhudia says that the next round of cuts will benefit those with smaller deposits, instead of driving rates even lower for the equity-rich.
This means those customers may do well to hold out, rather than switching deals now.
‘Rather than rates dropping much further from some of these all-time lows, we expect more movement to take place at higher loan-to-value ratios over the coming months – that will be a boon for buyers that were overlooked during the pandemic, particularly first-time buyers.’
Other brokers envision rates for 40 per cent deposit borrowers dropping far lower than the current 0.83 per cent floor.
‘With so many lenders consistently improving their pricing to offer super-cheap rates I would not bet against a lender offering a 0.5 per cent fix soon,’ says Aaron Strutt of Trinity Financial.
Ultimately, it is a call for borrowers to make. ‘How long they stay [at this level] is anyone’s guess, and if someone tells you they know, they’re lying,’ says Lewis Shaw of Shaw Financial Services.
And everything must be viewed in context. Even if rates did drop lower, 0.83 per cent still represents a historical low, and much less than homeowners who took out their loans pre-pandemic are currently paying.
Is it worth exiting early – and paying the penalty – to bag a low rate?
For borrowers on their mortgage lender’s standard variable rate – the higher ‘default’ rate that homeowners drop on to after their fixed deal ends, currently around 3 to 4 per cent for most lenders – there will be no exit fee, so switching makes sense.
But for those already tied into a two- or five-year fixed rate, there is still a chance they could save money by switching to one of the new low-interest deals, even if they did have to pay an early repayment charge to exit their current deal.
‘Recently we have seen clients who have benefited from paying the early redemption charge on their existing mortgage as the new rate is so much better,’ says Matt Coulson, director at broker Heron Financial.
This depends on your individual circumstances, however, so checking early repayment charges and carefully calculating monthly payments, fees and compound interest – or getting a broker to do it for you – is vital.
Speaking to a broker could help homeowners establish whether choosing a five-year fix on today’s interest rates could save them money in the long term
Should borrowers consider a five-year fix?
Two-year fixed rates are the most popular with UK mortgage borrowers, with many preferring the flexibility that they offer in case they need to move house, for example.
But for those who are confident they will be staying put, now could be the time to consider a longer fix.
Not only could they lock in a low rate for longer on a five-year fix, but they would also avoid paying fees again when they remortgaged in two years’ time.
Says Boulger: ‘The difference between rates fixed for two and five years is small and borrowers need to consider carefully whether a longer term fix, say for 5 years, would suit them better.
‘For example for mortgages with 40 per cent deposits or more, the monthly cost on a £200,000, 25 year repayment mortgage at 0.99 per cent is £753 per month, whereas a two-year fix at 0.83 per cent would cost £738.
‘The saving with the two year fix of £15 per month over two years is £360, whereas the fees to switch to another deal in two years time are likely to be more than that.’
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