Mortgages: is this the best of times?

http://www.theguardian.com/money/2015/feb/11/mortgages-interest-rates-best-of-times

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The best time ever to take out a mortgage? Certainly rates are at a record low. For months banks and building societies have been embroiled in a price war as they attempt to build market share, and as the prospect of a base rate rise has receded, mortgage rates have tumbled.

“Across the board rates are low,” says Andrew Montlake of mortgage brokers Coreco. “Whether you have a 40% deposit or 10%, the lenders are just battling it out for business.”

Montlake says the rates are the best in a generation. “Two-year fixed rates are heading towards 1%, while five-year rates are heading towards 2% – it’s just extraordinary.”

Figures from the Bank of England offering a snapshot of the average rates on offer show that the cost of two- and five-year fixed-rate loans has fallen since the autumn. In January, borrowers with a 25% deposit to put down were typically being offered loans around 0.2 percentage points cheaper than in October, while those with just a 5% deposit have seen bigger falls – the cost of a five-year fixed-rate deal at 95% fell by half a percentage point.

Over the past year, the average cost of a two-year variable rate deal – one that is linked to the Bank of England base rate or the lender’s standard variable rate (SVR) - has dropped from 2.82% to 1.64%.

And borrowers with bigger deposits are being offered even better deals. HSBC has a discount mortgage with a starting rate of just 0.99% or borrowers who have a 40% deposit, or that much equity in a house that they are remortgaging.

When it comes to fixed-rate deals, HSBC has a two-year deal at 1.19% for borrowers who have a 40% deposit, while Chelsea building society is offering a rate of 1.24% over two years to those with a 35% deposit. Over five years Chelsea is charging 2.19%, and over 10 years you can fix at 2.94% with Santander if you can put down a 30% deposit.

The interest rate on the mortgage is not the whole story – the best headline rates tend to have hefty fees. HSBC’s deals attract a non-refundable fee £1,499, while Chelsea is charging £1,545 and Santander wants £995 upfront. But even fee-free loans are historically cheap. At HSBC the fee-free two-year fixed-rate deal is at 2.29%.

If you are willing to take on a £345 fee at Chelsea building society you can still get a two-year fixed-rate deal below 2%, at a rate of 1.64%.

Montlake says it’s important to look at the whole picture, rather than being “enticed by the lowest rates”. For borrowers with small mortgages, for example, a fee-free deal could easily work out cheaper than one with a lower monthly cost.

Will it continue? The Council of Mortgage Lenders suggests it could. Banks and building societies are benefiting from inflows of cash from savers, which they can lend cheaply, plus the availability of cheap money on the wholesale funding market.

The CML recently concluded: “Obviously, there may be some bumps in the road, and market volatility could affect funding rates. There remain some large geo-political risks both in Europe and further afield. However, if these bumps can be successfully negotiated, the outlook will be for low mortgage rates to continue.”

However, while rate-wise it might be the best time to take out a mortgage, it isn’t quite that straightforward. Borrowing has become harder since new rules were brought in in April 2014. Lenders are now obliged to look a lot more closely at borrowers’ outgoings as well as their earnings, and to check that they could still afford repayments if rates were a lot higher. Montlake says banks and building societies are “fighting for the same customers”, and if they want to build market share they should consider changes to criteria to make it easier for the self-employed, older borrowers and those who already have mortgages but may not fit the new rules.

It may be cheaper than ever to get a mortgage, but it is not easier than ever.