How low can mortgages go?

Mortgage rates are likely to keep falling after the Bank of England hinted that it is likely to cut the base rate this summer – while markets think a cut could come as early as next week.

Lenders have been enmeshed in a price cutting war for the past month, slashing rates to all-time lows for borrowers across the board.

Currently the lowest rates on offer are for those with a 35 per cent deposit or equity stake. HSBC will let you fix for two years at 0.99 per cent, while those looking for low rates for longer can fix for five years at just 1.99 per cent.

First Direct is the latest in a string of lenders to cut mortgage rates with fee-free rates starting from just 2.79 per cent fixed for two years for those with a 10 per cent deposit or equity in their home.
For those with a heftier deposit of 40 per cent, the lender has also launched a two-year fixed-rate deal priced at 1.28 per cent.

It’s low but there are some hitches – it’s not the best rate on the market at the moment and there’s an upfront fee of £1,450 to pay.

Rachel Springall, of personal finance site Moneyfacts, said: ‘This new deal will likely turn heads as it is the fifth-lowest rate currently available.

‘However, borrowers will need to open a current account alongside the mortgage to be eligible and pay an upfront fee of £1,450 – a fee that rises depending on the amount borrowed.

‘The deal does come with an incentive of free legal fees for those remortgaging but on a true cost basis borrowers might find a more cost-effective deal elsewhere.’

Experts say it’s likely that more lenders will follow. David Hollingworth, of mortgage broker London & Country, said: ‘Although these First Direct rates are not necessarily market beaters it does show that there is scope for more lenders to sharpen up their rates and there could well be more competition to come.’

On Friday, Leeds Building Society cut its 10-year fixed rate from an already low 2.89 per cent to 2.84 per cent at 65 per cent loan-to-value with a £1,499 fee. It also cut rates on other deals by as much as 0.21 per cent on five-year fixed rates.

Coventry Building Society, meanwhile, launched some new 50 per cent LTV rates last week, including a five-year fix at 2.09 per cent with a £999 fee.

These changes are just the latest in a spate of cuts across the market with average two-year fixed rates falling steadily day by day.

Data from Moneyfacts shows the average two-year fixed rate is now at 2.55 per cent, down from 2.56 per cent last Thursday. A month ago it was 2.58 per cent and a year ago, 2.76 per cent.

But they could be set to go even lower: the Bank of England has hinted it could cut the base rate from its all-time low of 0.5 per cent.

That news has sent markets into a spin and swap rates – the money market rates that lenders borrow at and which, therefore, influence the rates they charge borrowers – have fallen as a result.

It comes as gilt rates – the rate at which the government borrows and which influences nearly all other money market rates including swaps – entered negative territory for the first time ever.

Laith Khalaf, a senior analyst at investment company Hargreaves Lansdown, said: ‘It’s only one gilt affected so far, maturing in March 2018 and now yielding -0.04 per cent, but this is a landmark for the UK interest rate environment.

‘The UK is now officially through the looking glass as the Brexit vote has pushed gilt yields below zero for the first time. Remarkably markets are now expecting interest rates to lurch downwards, despite already being at record lows.’

Markets are now pricing in a cut in base rate when the Bank of England’s monetary policy committee meets next week on 14 July.

Khalaf added: ‘They are also pricing in a one-in-four chance of base rate turning negative over the course of the next year.’

For those willing to take a gamble on this when taking out a mortgage, a tracker deal usually tracks the base rate meaning that if the Bank does cut rates next week – most likely to 0.25 per cent – your mortgage payments will fall.

Equally they will rise if or when the Bank decides to raise rates in the future.

Mark Harris, chief executive of mortgage broker SPF Private Clients, said: ‘Falling mortgage rates are great news for borrowers and there is growing expectation of a base rate cut so those who can afford to gamble may be tempted by a cheap tracker rate mortgage instead.’

Santander has a 1.39 per cent two-year tracker on offer at the moment, with monthly repayments coming in at £592.18 a month for a mortgage of £150,000. It has a £995 fee and is on offer to borrowers with a 40 per cent deposit.

Written by: Houseladder