Take advantage of the new mortgage rate war

Mortgage lenders have been locking horns in a battle to produce the cheapest fixed rate deals in history.

The war broke out after the Bank of England launched its Funding for Lending scheme, which will open the floodgates to £80bn worth of extra loans for consumers and businesses, as well as reward banks for lending more. Falls in ‘swap’ rates (which are used to price fixed rate deals) and in Libor (the rate at which banks lend to each other) have also fuelled reductions in the cost of home loans.

So whether you’re buying a home for the first time or coming to the end of your current mortgage deal, if you are looking to freeze the rate you pay, you couldn’t have chosen a better time. We round up some of the best deals.

The latest action

HSBC threw down the gauntlet in the price war with its 2.99% five-year fix, for borrowers with a 40% deposit or that level in existing equity, marking the cheapest mortgage rate over that timeframe in history. However, it was short-lived as the deal was pulled sale a month later. 

Rival banking giant Santander soon retaliated by slashing the rate of its five-year fix down to an identical 2.99%, also for borrowers with a 40% deposit. However, to qualify applicants must have held a current account with the bank for at least 30 days at the time of application – or have a mortgage with the bank already and be moving home.

You will also need £1,495 in fees to open the account.

Unsurprisingly, both banks charge relatively hefty fees on these mortgages of £1,499 and £1,495 respectively.

Not to be outdone, NatWest then undercut both HSBC and Santander with a five-year fix of 2.95% (also with a 40% deposit) setting yet another new record. The fee on this deal, however is an even heftier £2,495 but, according to Ray Boulger at mortgage broker John Charcol, it’s worth paying if you are taking a larger mortgage.

He said: “NatWest’s arrangement fee is well above average at £2,495, which is obviously to subsidise the rate, but even so this still represents fantastic value for mortgages of at least £100,000.” He adds that, in addition, anyone remortgaging will qualify for a free valuation and free legal fees.

For loans of less than £100,000, it may be worth paying a higher rate and a lower fee. For example, Nationwide is offering a five-year fix priced at 3.39% with a fee of only £499 if you are buying a new property – and just £299 if you are buying a home for the first time. For remortgagers, however, the fee is higher at £999.

Nevertheless, so long as your mortgage is not more than 60% of the value of your home (even though this particular deal is available up to 70%), it could offer better value than the sub-3% rates simply because of the lower fee, according to Ray Boulger.

The other side of fixing

The downside to a fixed rate mortgage is that you will be tied as for as long as the deal lasts. You should be able to ‘port’ your mortgage to a new property during this time (so long as the lender deems it adequate security for the loan), but if you want to sell up and pay off the debt, you will need to fork out early repayment charges, which can run into thousands of pounds.

So while a five-year fixed rate deal will provide security and a guaranteed low payment, on the flipside, it will cost you some flexibility.

Shorter-term fixed deals

There are plenty of shorter-term fixed rate deals that have come down in price too. Next to wade into the fixed rate mortgage war, for example, was Nationwide, which slashed the rate on its ‘Flexclusive’ four-year fix down to market leading 2.89% for loans up to 60% of the property value.

The deal comes with a £900 product fee which is reduced to £400 if you are a first-time buyer. However, like Santander, the mortgage is only available to customers who hold the lender’s FlexAccount as their main bank account.

If you are looking an even shorter two-year fix, prices in that camp have dropped too. So long as you are purchasing a home, rather than remortgaging, Barclays has lowered its two-year fixed rate to 3.29% in exchange for a 30% deposit – and the deal charges no application fee.

Supermarket giant Tesco, that announced its long-awaited entrance into the mortgage market on Monday August 6, trumped Barclays’ two-year fix with a rate of 3.19% also for a 30% deposit. However, this deal comes with a £995 fee. Tesco also offers a ‘no fee’ option priced at 3.59% for the same deposit which – according to number-crunching from MoneySupermarket – works out better value.

Tesco Clubcard holders will earn a point for every £4 spent on their mortgage repayments, although a borrower repaying £750 a month would only accrue points worth £22 over a year.

Virgin Money has also launched a new two-year mortgage fixed at 2.99% with a £995 product fee if you have a larger 40% deposit. Alternatively you could opt for the 3.39% deal and side-step the fee. Customers remortgaging from another lender will benefit from free standard legal services and a free basic valuation.

Lower deposits

Rates are falling on deals for borrowers with smaller deposits. Halifax has slashed the cost of its two-year fixes by 0.2% and is now offering applicants with a 20% deposit a rate of 4.34% if they go to direct to the branch (rates from intermediaries are higher), while borrowers with a 15% deposit will pay a fixed rate of 4.64% for two years.

Both deals come with a £995 product fee – though first-time buyers won’t need to pay this and will even receive £1,000 cashback on completion of the deal.

HSBC has also cut its two-year fixed rate deal by 0.2% down to 4.29% for borrowers with a 10% deposit – and reduced its five-year fixes by as much as 0.5%.

Even if you can only lay your hands on a 5% deposit, fixed rates are still cheaper than they were. Santander has cut its three-year fixed rate deal at this borrowing level down to a market leading 4.99%, while its five and seven-year deals have been slashed to 5.29% in return for the same deposit. Both come with a low fee of £99 plus free valuation and £250 cashback on completion.

The mortgages, which are available only through Abbey Intermediaries and not on price comparison websites, are part of the government’s NewBuy scheme which is designed to help first-time buyers get on the housing ladder.

The difference of just a few percentage points on a loan big enough to buy a house can make a world of difference to your pocket so, even though fixed rates are tumbling, it’s still important to do your homework. Visit MoneySupermarket's mortgage channel to shop around and make sure you are up-to-date.

Or our mortgage partner, London & Country, also offers fee-free independent advice on 0844 209 8725.

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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