Headline-grabbing mortgage rates have increased rapidly in recent weeks. It started with the first less than 1% deal in several years and continued with lenders launching their cheapest home loans ever. As of last week, it was possible to line up for two years at just 0.94%, or to go for five years at just 1.06%.
“A number of providers have launched eye-catching below 1% rates in recent weeks to tempt new borrowers,” says Eleanor Williams of financial data provider Moneyfacts. “This indicates an appetite for lending on the part of mortgage providers and reflects an ability to lower prices as we remain in a low interest rate environment.”
David Hollingworth of L&C Mortgage Broker says “to talk about five-year fixed rates just above 1% is really amazing”.
These better buy rates are available for those with at least 40% deposit, but there has also been a series of price drops at the other end of the market.
Typically, mortgages with the lowest interest rates will carry fees. Hollingworth says that on the 0.94% offers offered by HSBC and TSB, the best in the market, the fees are no higher than those charged on previous mortgages with higher rates. HSBC, which offers its offers to buyers and remortgage, charges a fee of £ 999, while TSB, which offers its loan only to remortgage, charges £ 995.
However, on HSBC’s five-year 1.04% fixed rate – only available to its Premier account customers – the fee is £ 1,499.
Charges should be factored in when deciding on a transaction, and “borrowers should not be swayed by just one tempting low rate,” says Williams. “It’s important to compare the different options and make sure they take into account the true overall cost of a new mortgage transaction. “
Hollingworth calculated the numbers for Guardian Money and compared HBSC’s 0.94% deal with the one he proposed set at 1.14% for two years and at no charge. He looked at the cost over the first two years of a 25-year mortgage and found that for loans of £ 458,000 and over, paying the fees was worth it. Below that, the total amount paid was less than the highest rate.
He notes that “the reality is that a lot of people will add the fees to the loan, which means they will feel it less,” but when that happens, the fees accumulate interest that will be repaid over many years.
To verify, you can use an online mortgage calculator to find the monthly payments on the initial rate, then add them up for the fixed period, then add any charges.
Asking for the lowest rate may seem like a good way to pass a lender’s affordability checks, but it is unlikely to be the case. Instead of checking that you can pay the monthly fee on the initial rate, most will calculate using a much higher rate.
“If you take a solution of five years or more, some lenders will base the calculations on the pay rate, but most will have an affordable amount,” Hollingworth explains.
“The fact that you pay 0.94% won’t make a difference to how much they lend, because after two years you should switch to the standard variable rate, so they will look at a higher rate than that. “
For first-time buyers, the good news is that after a year in which offers for small deposits were first canceled and then available on a very limited basis, the government’s 95% mortgage guarantee program seems to have revived the market. .
Hina Bhudia, Partner at Knight Frank Finance, Says: “A Price War is Emerging at Higher LTVs [loan-to-values], which is great news for buyers with deposits of 15% of a home’s value or less. “
She has seen “a lot of movement on rates,” and recently said that most of the major lenders have announced discounts on mortgages for buyers with small deposits.
Hollingworth says the current best buys for those with a 5% deposit are a two-year fixed rate from the Coventry construction company at 3.25% with a fee of £ 999, and an agreement from the construction company of Leeds over five years at 3.6% with fees of £ 499.
“When they started at 95% just a few weeks ago, the rates were just under 4%, so the growth in the number of lenders in the market, along with their desire to take more business, have helped to lower these rates. “
At 95% and 90% LTV, rates are still generally higher than they were two years ago, but Bhudia expects things to continue to improve. “The bottom of the chain is what’s going to move the market, so I think high LTV mortgages are going to keep going down,” she said.
Hollingworth says that at the lowest LTVs he expects the competition to keep rates low, but “I don’t see them coming down much more. Maybe there will be a sparkle here and there if they can.
“This is why the activity could be around the high LTVs as this is where there is a little more room.”
Bhudia says she expects the market to remain competitive. “If HSBC kicks in and pulls its rate, someone else will come – Santander is just behind at 1%. There is no reason for lenders to raise rates until we get into another foreclosure and they can keep up with customer service. “
Cashback is making a comeback
With the intensification of competition in the mortgage market, an increasing number of lenders are attempting to entice borrowers with the “carrot” of a repayment.
Financial data provider Moneyfacts This week told us that the number of fixed rate mortgage products with cash back has jumped over 70% in one year, from 735 in July 2020 to 1,263 this month.
According to Moneyfacts, the average cashback payout currently on offer is £ 383, up from £ 355 a year ago.
The highest figure currently on offer is £ 1,500 courtesy of Danske Bank in Northern Ireland, while Santander recently added £ 1,000 in cash back to some of its mortgages for first-time buyers.
Such offers often target cash-strapped first-time buyers. But experts say it’s important not to be overly influenced by the freebies. The interest rates on cash back mortgages tend to be a bit higher than those without repayment, so if you’re tempted, you’ll have to do the math.
A lot will depend on the amount you are borrowing. Generally speaking, cash back offers make more financial sense on smaller mortgages. That said, a decent cash back can ease the cash flow at what can often be a tough time.
Lenders offering £ 1,000 include Virgin Money, the Yorkshire real estate company’s Accord Mortgages arm, Platform (part of the Co-operative Bank) and Kensington Mortgages.
“This is a far cry from the deals that existed before the financial crisis with cash back rewards of up to tens of thousands of pounds, but it looks like a growing trend,” said Nick Morrey, technical head of products at the mortgage broker. John Charcol.
Santander’s first-time buyer offers for £ 1,000 cash back include two that allow people to borrow up to 95% of the property’s value: a two-year 3.78% patch and a patch five years at 3.93%. With both, there is no product fee to pay, although the maximum loan is £ 570,000.
Here’s an example of how math can work, based on the current two-year fixed rates at 75% loan-to-value ratio (LTV). Regarding these offers, Virgin Money offers the lowest rate with a cashback of £ 1,000: 1.28%. However, the lowest two-year fix to 75% LTV is a 1.07% Platform deal with £ 250 in cashback.
The difference is £ 750 in cashback and 0.21% in interest. For a two-year £ 200,000 mortgage, paying 1.28% instead of 1.07% would mean paying an additional £ 456 in repayments. This means you would be ahead financially by taking the 1.28% deal from Virgin with the £ 1,000 cashback. But if it was a £ 500,000 mortgage, you would pay an additional £ 1,152. In that case, you would be better off financially with Platform’s lower rate and lower reimbursement.
This is why some people may think that hiring a broker, who can look at a borrower’s individual situation and calculate the numbers, is a good idea. “Generally speaking, you have to look at the monthly payment offered, multiply it by the number of months in the transaction, add any fees and subtract any cashback,” he adds.
* All prices are correct at time of writing