The truth about cheap fixed-rate deals
It seems mortgage borrowers have never had it so good when snapping up a deal, as stiff competition between providers has managed to drive costs to new lows.
Recently, HSBC threw down the gauntlet when it launched a five-year fix at 1.99%. Although the offer came with a sizeable arrangement fee of £1,499, and is only available for those with a 40% deposit, it marked the first time a five-year fix was priced below the 2% threshold. It then launched a variable rate deal at just 0.99%.
So far, 2015 has witnessed a flurry of price reductions. Personal finance expert Andrew Hagger of Moneycomms.co.uk says: "Competition is thriving in the market. If you see one provider cut its rates, you find other competitors follow very swiftly."
Such has been the activity in cost cutting that Moneyfacts estimates that on a 25-year £150,000 mortgage, borrowers could save a massive £12,434 in interest on a low-rate five-year fixed deal now, compared to what was on offer in 2010.
While fixed-rate borrowers have the security of paying the same amount every month for the fixed period of their mortgage (of usually two, three, five and sometimes 10 years), historically they have paid a premium for the security of doing so.
In contrast, tracker or variable-rate mortgages, as the name suggests, can move up and down during the mortgage term, following the trajectory of interest rates – so if the base rate rises, so too will the monthly payments and vice versa.
But given that borrowers take on the risk of having potentially heftier payments down the line, variable deals have traditionally been cheaper than fixed rates but that gap has narrowed significantly.
David Hollingworth, mortgage expert at broker London & Country Mortgages, says: "The vast majority of borrowers are going for a fixed deal. I think it has been an easy decision. Interest rates are at record lows and there is not much room for them to go any lower."
Numbers from UK trade body the Council of Mortgage Lenders further highlight this trend, where since the start of 2013 the vast majority of home loans taken out every month, at around 85% to 95%, have been fixed-rate deals.
Hollingworth points out that if a borrower opted for a long-term variable deal, Coventry Building Society is offering 1.79% but, given that HSBC's five-year fix is at 1.99%, it would not take much movement in interest rates for the gap to close. "There is really very little in terms of price advantage," he adds.
Why are rates so low?
While jostling between providers in a bid to top the best- buy tables has been a major factor in helping to drive costs down, the combination of ultra-low interest rates – now at 0.5% for more than six years - and government initiatives have also contributed.
The deals mortgage providers put on the market are largely dependent on how much cash they can lend out. While much of this can be taken from deposits, they also borrow from other banks and the price they pay is known as the swap rate, which will typically rise and fall on the back of anticipated interest rate movements.
Last year, the general consensus was that the Bank of England, which is responsible for rate setting, was going to increase the cost of borrowing from its record low, which caused swap rates to increase in preparation.
But this hike never happened causing swap rates to tumble back, which subsequently pushed interest rates on deals lower again.
The renewed activity in the property market over the past 18 months, coupled with rising house prices, has naturally played its part too. In addition, new legislation on the back of the City regulator's Mortgage Market Review, introduced just over a year ago, which tightened consumer borrowing rules, has also given providers more confidence in lending cash at discounted rates.
Banks and building societies are also finding that they have surplus money due to the Funding for Lending scheme, which was launched in 2012. The initiative originally allowed lenders to borrow cheaply from the Bank of England on the condition that they then use some of the money to offer mortgages to homebuyers, though it has since focused more on lending to small and medium-sized businesses.
Is now the time to fix your deal?
Given that inflation in the UK has hit 0% this year and the rate of growth in the UK economy halved to 0.3% between January and the end of March (compared to the final three months of 2014), the Bank of England is under no immediate pressure to raise interest rates. Currently, analysts do not expect any increase until next year at the earliest.
Looking ahead, Brian Murphy, head of lending at Mortgage Advice Bureau, says: "With the current low level of inflation and the Bank of England concerned that lifting the Bank base rate would destabilise Britain's ongoing recovery, it is looking increasingly more likely that interest rates will not increase until some time in 2016 – leaving lenders to fight among themselves in a thriving market full of previously struggling home buyers hoping to take advantage of the low rates."
But while there may be no movement this year, it is worth bearing in mind that the low costs of borrowing could vanish quickly when the base rate does begin to climb.
As a result, the message from the experts appears to be "make hay while the sun shines" as being able to fix at such a low level not only offers decent savings but protection against future rate rises.
Hollingworth believes that for most people now is "an ideal time to fix, as it gives them a chance to lock in at the bottom". How long you fix for is down to personal circumstances but remember that early repayment or cancellation can incur some hefty charges.
If you are on a tight budget, fixing makes sense but look at product fees too. In terms of the best deals on the market, while the HSBC deal is topping the five-year fix tables right now, Norwich & Peterborough Building Society is offering an even lower fixed rate of 1.64% but for only two years. It comes with a £345 arrangement fee and you must have a 35% deposit.
For borrowers with a 10% deposit, the best two-year fix is from Clydesdale/Yorkshire Bank, which has a rate of 2.79% and carries a £999 set-up fee. Leading the tracker offers is Norwich & Peterborough Building Society with 1.19% for two years. It has an £845 fee but you must have a 35% deposit or equity.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
A charge some brokers (and, increasingly, lenders) make for arranging your loan or mortgage, either as a flat fee or a percentage of the amount you wish to borrow. In order to look ultra-competitive in the best-buy tables, some mortgage lenders will offer mortgages with an attractive low rate and recoup any losses with a hefty arrangement fee.