Mortgage costs cut for those with hefty deposit

MORTGAGE lenders have their sights set on borrowers with deposit cash, writes Jeff Salway.
Jeff Salway. Picture: Jeff SalwayJeff Salway. Picture: Jeff Salway
Jeff Salway. Picture: Jeff Salway

Mortgage lenders are targeting borrowers with the cheapest long-term deals on record as loan rates continue to fall.

Barclays, HSBC, First Direct, Santander and Nationwide have all slashed mortgage costs in recent weeks, in a price war aimed mainly at people with substantial deposits but also benefiting first-time buyers.

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The latest salvo was fired this week by Barclays, which cut the rate on its ten-year mortgage from 3.45 to 2.99 per cent. However the deal, which has a £999 fee, is available only to borrowers with equity or a deposit of at least 40 per cent.

There are now almost 80 ten-year mortgages on the market, according to Moneyfacts, up from just eight this time last year. The average ten-year mortgage rate is now at an all-time low of 4.17 per cent, down from 4.98 per cent in October.

Sylvia Waycot, of Moneyfacts, said: “The ten-year fixed-rate bandwagon is racing down the road and lenders seem to be jumping all over it.

“This is great news for borrowers as they are able to fix their repayments for a decade at a time, which removes the fear of what happens if interest rates rise.”

The Barclays move came just days after First Direct slashed the cost of all its fixed-rate mortgages for borrowers with deposits or equity of 25 and 35 per cent. Its three-year fixed rate for borrowers with at least 35 per cent to put down is now 1.99 per cent, while its new ten-year fixed-rate mortgages start at 3.49 per cent.

Short-term rates are at record too. The latest two-year fix from HSBC has a rate of just 1.29 per cent, for those with 40 per cent to put down, while Yorkshire Building Society is offering 1.39 per cent.

The average interest rate on a two-year tracker dropped to 2.38 per cent in November, according to the Mortgage Advice Bureau, the lowest since 2007. Its figures also showed that the average two-year fixed rate fell by 0.27 per cent to 3.44 per cent in the three months to November.

Mortgage costs have been coming down since late last summer, when lenders began to pass on the benefits of a fall in the cost of interbank borrowing. The trend also reflects a period of calm in the mortgage market after the introduction last spring of new affordability rules.

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Interest rate expectations are playing a role as well. The Bank of England indicated in the autumn that the base rate, left at 0.5 per cent since March 2009, would finally rise in the early part of 2015. That is now unlikely, but a modest increase remains on the cards this year.

Mark Dyason, director of Edinburgh Mortgage Advice, advises borrowers able to take advantage of cheaper rates to do so soon.

“While I don’t expect the general market rates to rise until the base rate rise gets nearer and more certain, it does depend on the lenders appetites for lending,” he said. “So while there will be good rates about, if you are ready then you should be looking at taking the opportunity.”

Lenders are set to further reduce their long-term deals over the coming weeks. The more likely it is that the base rate rises soon, the greater the appeal of long-term rates that help insulate borrowers against rate increased.

“Longer term products might offer customers more certainty and safety once this current becalmed base rate period ends,” said Dyason.

Watch out for the early repayment charges (ERCs) levied if you want to move or get out of the deal early, however. Barclays’ new ten-year loan has an ERC of 6 per cent in the first seven years and 3 per cent in the last three.

And while the interest rates on mortgages are coming down, it doesn’t necessarily follow that the total cost of a mortgage is lower. That’s because many of the cheapest deals come with high fees that for some borrowers will wipe out the savings from the lower rate.

First Direct’s new three and five-year deals have fees of £1,450, for example, while HSBC’s 1.29 per cent two-year fix comes with a £1,499 fee.

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“Some of the headline grabbing deals carry significant fees, which means that sometimes the full package offered by one lender can be much better than the headline rate of another,” said Dyason.