Jeff Salway: Mortgage rates fall in price war

Banks and building societies are reviewing their lending targets as the year enters its final quarter. Picture: Nathaniel Benefield
Banks and building societies are reviewing their lending targets as the year enters its final quarter. Picture: Nathaniel Benefield
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A HOME loan price war has erupted to give borrowers the chance to lock into cheaper mortgages before the Bank of England raises interest rates.

Some of the UK’s biggest lenders have slashed their cheapest rates over the past few weeks and several are offering borrowers incentives as competition ramps up.

Barclays, Lloyds, Nationwide, HSBC, Tesco Bank, Clydesdale and Virgin Money are among the brands to have launched new deals in a bid to boost their market share and hit their lending targets.

The latest cuts came the week after Mark Carney, governor of the Bank of England, suggested an interest rate rise was moving nearer. Economists predict a rise in the first part of 2015, most likely in February. That means time will soon be running out for borrowers to snap up cheap deals.

“I’d say that now would be a very good time to fix,” said Robin Purdie, director of MOV8 Financial in Edinburgh.

“Product rates can’t get much lower, so it stands to reason. The vast majority of purchasers are choosing fixed rates at the moment and there are hugely attractive remortgage products for those coming to ‘review’ time.”

The flurry of rate cuts is due to a number of factors, including a recent fall in the swap rates that determine the cost of bank borrowing and the market adapting to new mortgage affordability rules.

Banks and building societies are also reviewing their lending targets as the year enters its final quarter, said Ian McGrail, director of Scottish broker First Mortgage.

“They will continue to scramble around for market share until they hit targets. We have seen an easing of mortgage approvals over the summer so they have a bit of catching up to do, which is the catalyst for the significant drops recently.”

One major lender is reported to be aiming for 1,000 new mortgage applications every day – a target that will only be achieved with competitive products. Some of the deals launched last month have already been pulled from the shelves due to high demand.

Rachel Springall, spokeswoman at Moneyfacts, said: “With rates so competitive today it is an ideal time for any borrower to assess their current deal, whether to refinance or make the leap into securing their first home.”

The average cost of a two-year fixed rate mortgage at 75 per cent loan-to-value (LTV, where there’s equity or a deposit of 25 per cent) is now 3.16 per cent, down from 3.46 per cent just a month ago. The average two-year fix at 90 per cent LTV has fallen from 4.38 per cent to 4.29 per cent over the same period, Moneyfacts figures show.

The cost of the average five-year loan has also reduced, with a 90 per cent LTV fix now 4.91 per cent (down from 4.98 per cent a month ago) and a 75 per cent deal down to 3.75 per cent (3.84 per cent on 2 September).

The latest rate changes came on Thursday when Barclays cut the cost of its range of fixed rate mortgages for borrowers with between 20 and 40 per cent to put down.

Some of the most eye-catching launches have been on five-year fixed rates. Tesco is promoting a five-year deal at 2.99 per cent with a fee of £1,495, while West Bromwich Building Society has a 3.18 per cent fix over the same term but with a fee of just £599.

“These longer-term deals offer super value and will help customers protect their mortgage payments for longer against future rate rises,” said McGrail.

But the longer the mortgage term, the greater the chance of being hit by a penalty charge if you want to move before it expires, warned Purdie.

“Ask yourself if there’s any chance of you selling in the next five years,” he advised. “Yes, most mortgages are portable, but lending criteria change all the time, and not every lender lends on every type of property.”

The key to taking advantage of the cheap deals available lies in preparation, according to Purdie.

The affordability rules introduced in April, aimed at preventing irresponsible lending, require borrowers to take extra steps to prove they can afford loan repayments. They also place the onus on lenders to take full responsibility for ensuring borrowers can repay their loan, with the consequence that applications are taking longer and more are being rejected.

“You could be attracted to the lowest rate in the land, but you’ll waste an awful lot of time applying if you ultimately don’t meet the lender’s criteria,” said Purdie.

“Get all ‘proof’ documents to your broker as soon as possible so that they can check them over and prepare a detailed list of all income and outgoings.”