Mortgage rates have hit record lows for some borrowers, but could rates fall any further?
Mortgage lenders are struggling to tempt borrowers with large deposits, and even those with the smallest down payments see interest rates drop.
Here which one? explains why mortgages are getting cheaper and speaks to two experts about whether this is the beginning or the end of the interest rate war.
Mortgage price war leads to record low interest rates
Mortgage rates have fallen steadily over the past few months, offering buyers with large deposits the lowest rates ever.
The price war began back in May when TSB launched the first two-year fixed-rate mortgage below 1% since 2017.
Since then, rates on two-year fixes have fallen to just 0.83% and five-year fixes have fallen below 1% for the first time.
These top deals are all available with a mortgage lending value of up to 60%, so they are only suitable for buyers with large deposits or those who have significant equity in their home to reschedule.
Are the prices cheaper only for people with large deposits?
So far, the price war has mainly focused on 60% mortgages, with lenders looking to hedge the habit of low risk borrowers. This means that some buyers will be excluded from the best deals.
Martijn van der Heijden from the online mortgage broker Habito says: “People with smaller deposits, with short employment, who are self-employed or buy new buildings have all experienced much less price war”.
However, there are indications that deals with a higher loan-to-value (LTV) are falling quietly in price, with the cheapest two-year term of 75% now only costing 0.99%.
David Hollingworth of L&C Mortgage believes that even buyers with the smallest deposits can now benefit from much lower interest rates than before.
He says, ‘The 95% mortgage market has seen a rapid increase in lender and product choice and this has helped improve interest rates. Interest rates started at nearly 4% earlier in the year, but they are rapidly approaching 3%. ‘
How Much Lower Could Mortgage Rates Go?
The big question for people looking to take out a mortgage is whether now is the right time to take the plunge, or whether rates could drop even further in the months ahead.
David Hollingworth says, ‘It certainly feels like there’s not much more that can be cut off at the moment, but we can’t rule out that there may be some lower rates to come’.
He says people in debt repayment may find that the cost of switching to their lender’s standard floating rate for a short period of time outweighs the benefits of waiting for a cheaper offer.
Martijn van der Heijden believes the price war was caused by a combination of record highs in savings and the introduction of the stamp tax, which warded off fears of falling property prices in the wake of Covid-19.
He says, “We don’t think these mortgages are particularly profitable for lenders right now, so rates are unlikely to come down much further from here. The record low deals on some two- and even five-year contracts may not last long. ‘
When will interest rates rise?
Cheap mortgage deals could soon face rising inflation. Inflation hit 2.5% last month, and the Resolution Foundation think tank predicts it could climb as high as 4% soon.
Higher inflation could lead to a rise in the Bank of England’s key interest rate, which affects mortgage prices.
The base rate is the interest rate that the bank charges when lending to commercial banks. It’s currently at a record low of 0.1%, but the prospect of a spike would likely cause lenders to raise their rates.
The Bank’s Monetary Policy Committee votes on the key interest rate eight times a year. Last month it decided unanimously to keep the current rate of 0.1%. This means the interest rate is unlikely to go up immediately, but lenders are sure to be on their guard.
Martijn van der Heijden says: “If inflation is assumed to rise structurally, the Bank of England will raise interest rates. Even before that happens, just signaling such an intention should lead to a sharp and rapid rise in mortgage prices. ‘
Listen to the latest episode of What? Money Podcast to find out how rising inflation could affect your money.
Best Mortgage Rates for Buyers and Debtors
The charts below show the cheapest rates currently available for homebuyers or rescheduling.
We have included both as prices can vary slightly. For example, some of the cheapest deals right now are only available to homebuyers.
You can move your cursor over the bars on each chart to see the cheapest rate and see which lender is offering it.
Best prices for people buying a home
Best prices for rescheduling
Should you always choose the cheapest tariff?
The lowest prices are sure to be tempting, but they may not be all they appear to be.
Lenders are increasingly charging up-front fees of up to £ 1,499 for their market-leading businesses. A higher fee allows lenders to offer lower interest rates but increases the overall cost of borrowing for the person taking out the mortgage.
We have found that in some cases, borrowers might be better off in the long run if they choose a more expensive interest rate with a lower fee.
David Hollingworth says, ‘Lenders may consider using higher referral fees to keep headline prices lower. Fortunately, most offer a range of options, including slightly higher pricing with lower or even no fees, so it should be possible to find the right overall customization. ‘
Martijn van der Heijden says, “A good mortgage advisor will offer you quotes based on their ‘true’ cost, taking into account any associated fees, charges or cashback incentives, so that you can fairly compare the costs between different products.”