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How low will mortgage rates go?

By Lana Clements 03.08.12

A new government scheme is expected to make the mortgage market extra competitive in the coming months, but doubts are already being raised about whether it will reach the neediest buyers.

The government has launched a new £80 billion scheme that it hopes will make the cost of borrowing cheaper for households and small businesses, but critics believe first-time buyers will miss out.

Under the Funding for Lending Scheme (FLS), over the next 18 months the Bank of England will provide cheap money to banks and building societies on the proviso that it’s passed on to customers in the form of loans and mortgages.

As a result of the boost, housing experts are expecting mortgage rates to drop. Already a price-war has broken out for those looking to borrow 60% of their home’s value – a hefty deposit in today’s falling property price market.

The lenders have a good reason to open their vaults as the more they lend the cheaper the credit available to them will be. But there’s nothing in the detail saying who they should give the funding to.

The no-strings attached approach means they can target safe borrowers with large deposits or those who already own a major proportion of their property rather than struggling first-time buyers.

Why has it been launched?

Based on worries about credit drying up in the face of the eurozone crisis, FLS is the solution to keep credit flowing through the economy. The government says that FLS will give as many institutions as possible the incentive to lend.

Chancellor George Osborne hopes the scheme will help small businesses grow and also provide a much-needed helping hand to the stagnant housing market through cheaper mortgages. Recent figures show that the property market has been stalling this year and values are slowly dropping.

Through the scheme, banks and building societies will be able to borrow up to 5% of the amount they lend at a rate of just 0.25%. Lending levels are being monitored by the Bank of England, and if a provider’s lending decreases they will be charged a rate of 1.25% on the funds, but if it increases they will be able to borrow more than the initial 5% allotted.

Rate war for those with big deposits

As a result of the scheme, a mini-price war has broken out among mortgage lenders. But crucially, the increased competition has – so far – only benefited borrowers with larger deposits.

HSBC set the bar by launching the lowest-ever five-year fixed-rate mortgage at 2.99% for borrowers with a deposit of at least 40%. The deal comes with a fee of £1,499. The mortgage rate was swiftly matched by Santander, who also beat the fee, but only by £4 to a cost of £1,495.

NatWest this week trumped both Santander and HSBC with a five-year fix at 2.95%, but again only for those with a 40% deposit needing a loan-to-value (LTV) at 60%. This rate comes with a massive fee of £2,495, so borrowers need to do their sums to find out which is cheaper for them over five years.

Virgin, under its Northern Rock brand, is also now offering sub-3% rates, but only on two-year fixes. Its rate of 2.99% is available at 60% LTV with a fee of £995. HSBC offers a lower rate of 2.64% on two-year fixes at 60% LTV, but with a much more expensive fee of £1,999.

These loans are available to new customers and those looking to remortgage.

Ray Boulger, of mortgage broker John Charcoal, says: "With the best five-year fixed rates now available at, or below, rates for shorter term fixes and even most trackers, the value sector of the market is currently undoubtedly five-year fixes, even when you factor in the possibility of Bank Rate getting even closer to zero later this year."

Nationwide, meanwhile has lowered the rate on its entire two and three-year fixed- rate mortgages, but again the reductions are best for those with a larger deposit. It is now offering a fix of 3.39% for three-years for those with a deposit of at least 30%. First direct also recently cut rates, but mostly for borrowers with a deposit of at least 35%.

Will other buyers benefit?

Santander has, so far, been the only lender to cut the NewBuy rates specifically aimed at first-time buyers. The lender reduced rates on NewBuy mortgages by up to 0.7 percentage points to offer a market-leading three-year fix of 4.99%, cut from 5.49%, for borrowers with a deposit of 5%.

Its five and seven-year fixes have been cut to 5.29%. The products come with low product fees of £99 and also give £250 back after completion.

Another major lender, Lloyds Banking Group, has committed to lend £5 billion in mortgages to first-time buyers by the end of 2012, but has not yet dropped any rates to reflect this target.

Mr Boulger recommends buyers with smaller deposits wait and see if the market catches up.

He says: "Current rates available on five-year fixed-rates up to 70% loan-to-value offer excellent value but for those with smaller deposits there is merit in waiting until the market settles down, when I expect better value will be available."

  1. Quick tips

  2. Compare all mortgage perks, including any cashback and fee waivers
  3. A mortgage broker can help give an overview of the market if you’re unsure
  4. Check out our best buy tables too as some lenders don’t go through brokers
Lenders are still not opening their doors to those most in need – the first-time buyers

Top tips

 for getting a good deal

Remember to factor in fees

A mortgage with a lower rate but high fees is not always the best option

Five-year fixes offer the best deals

If you’re in a position to get one of the cheapest ever rates now could be the time to fix

If you’re on a standard variable rate

Make sure you keep an eye on other rates - you could pay much less with a fix

Borrowers with smaller deposits

Should wait and see if the market gets more competitive


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