Focus on: Fix your mortgage at record low rate for 5 years – without a 40% deposit

Competition in the mortgage market is showing no signs of dwindling. But, as lenders fight to offer the lowest rates on record, now even those who can't stump up a 40% deposit are starting to see the benefits.

Just three weeks after Yorkshire Building Society knocked First Direct off the top spot by launching a five-year fixed rate mortgage at 2.64%, First Direct has hit back by matching this rate.

But what makes First Direct's offering stand out is that, while Yorkshire requires a 40% deposit, borrowers with First Direct will only need a deposit of 35%. What's more, they won't cough up as much in fees.

So is this the right mortgage for you?

What's the deal?

First Direct has launched a five-year fixed rate mortgage priced at 2.64%. In terms of rate, it is now joint market-leader in this camp, sharing the top spot with Yorkshire Building Society.

However, First Direct's offering (which is available on borrowing of up to £1m) requires a smaller deposit of 35% compared with Yorkshire's 40%, making it more accessible.

The First Direct mortgage also comes with a fee of £1,399. Compare that to Yorkshire's £1,345 and you'll automatically assume Yorkshire is offering the cheaper deal. But in fact, First Direct remains triumphant because Yorkshire charges a £130 processing fee on top – pushing up the overall cost to £1,475.

Who's it good for?

The latest mortgage offering from First Direct is ideal for those who have a sizeable deposit or sufficient equity in their home, but don't quite qualify for the majority of best-buy mortgages that require a deposit of 40%.

If you fall into this category and want to fix your repayments for five years at a record low interest rate of 2.64%, this could be the deal for you.

Any catches?

Although First Direct's mortgage will be more accessible to some borrowers, the 35% deposit requirement will remain unaffordable for many others.

And with purse-strings stretched to the max, finding an additional £1,399 for the fee may deter others still from applying for this deal.

Borrowers who do apply also need to ensure they are happy to commit to a five-year deal. Should you need to get out of the deal early, you will have to cough up an early repayment charge. This stands at 3% of the original loan amount in the first year and 2% during any subsequent years within the five-year period.

If you're unsure about tying in for this long, this may not be the deal for you. However, Andy Forbes, head of retail products at First Direct, maintains that five-year deals are becoming increasingly popular.

He said: "Over the last month we have seen competition increase in the mortgage market. In particular our five-year fixed rates have been extremely popular. In response to this demand we have lowered the rates on many of our five-year fixed rates, to ensure our customers have access to our most competitive rates."

What's the verdict?

If you're looking to remortgage or buy your first home, a rate as cheap as 2.64% is well worth snapping up - particularly as you'll be able to enjoy this record low rate for the next half-decade.

First Direct's mortgage also gets a thumbs-up for only requiring a deposit of 35% as opposed to the 40% most best-buy mortgages ask for.

And while the fee is still a pretty hefty £1,399, it's not as high as some – fees can be stretch as high as £2,000. Locking in for five years will also mean you'll switch deals less frequently and therefore pay fewer fees in the long run.

But if you're still reluctant to tie in for so long, you don't have to miss out on historically low mortgage rates.

Chelsea Building Society offers a two-year fixed rate mortgage priced at 1.74% with a £1,695 fee, while Yorkshire Building Society (which owns Chelsea) offers a two-year fix at a slightly higher rate of 1.79% but a lower fee of £1,345. You'll need a 40% deposit for both of these deals.

Alternatively, Norwich & Peterborough Building Society's two-year fixed rate deal is priced at 1.99% but has a much lower fee of £995. You'll still need a deposit of 40%, but thanks to the smaller fee, this is actually the cheapest option for anyone borrowing less than £250,000.

If you're unsure which mortgage is right for you, contact our mortgage partner London & Country for free, independent advice on 0844 209 8725.

Top tip!

Although the very best mortgage deals are still reserved for those with a large deposit, if you can only scrape together a deposit of 10%, you can still snap up some competitive deals. Take a look at our mortgage channel to find out more.

You will further boost your chances of being accepted for a competitive mortgage rate by ensuring your credit rating is up to scratch.

You can easily get hold of your credit report from one of the credit reference agencies which you can compare at our credit reporting channel.

And for tips on how to improve your credit rating, read Jessica Bown's article.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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