Headline-grabbing mortgage rates have been coming thick and fast in recent weeks. It started with the first sub-1% deal in several years, and has continued with lenders launching their cheapest home loans ever. As of last week it’s been possible to tie-in for two years at just 0.94%, or fix for five at as little as 1.06%.
“A number of providers have launched eye-catching sub-1% rates in recent weeks to tempt new borrowers,” says Eleanor Williams at financial data provider Moneyfacts. “This indicates an appetite to lend from mortgage providers, and reflects an ability to price low while we remain in a low interest rate environment.”
David Hollingworth, from mortgage broker L&C, says that “talking about five-year fixed-rates just above 1% is astonishing really”.
These best-buy rates are available to those with at least 40% to put down as a deposit, but there have also been a raft of price cuts at the other end of the market.
Typically, the mortgages with the lowest interest rates will have fees attached. Hollingworth says that on the market-leading 0.94% deals offered by HSBC and TSB, the fees are no higher than were being charged on previous mortgages with higher rates. HSBC, which offers its deals to buyers and those remortgaging, charges a fee of £999, while TSB, which is offering its loan to remortgagors only, charges £995.
However, on HSBC’s five-year fixed rate of 1.04% – available to its Premier account customers only – the fee is £1,499.
Fees should be considered when you are deciding on a deal, and “borrowers should not be swayed by a temptingly low rate alone,” says Williams. “It is important to compare the different options and ensure they consider the overall, true cost of a new mortgage deal.”
Hollingworth crunched the numbers for Guardian Money, and compared HBSC’s 0.94% deal with one it offers fixed at 1.14% for two years which has no fee. He looked at the cost over the first two years of a 25-year mortgage, and found that on loans of £458,000 and more, paying the fee was worthwhile. Below that, the total sum paid was lower on the higher rate.
He notes that “the reality is that lots of people will add the fee to the loan, which means they will feel that less,” but where this happens, the fee is accruing interest that will be repaid over many years.
To check, 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 fee.
Applying for the lowest rate may seem like a good way of passing a lender’s affordability checks, but that is unlikely to be the case. Instead of checking you can afford the monthly costs on the initial rate, most will run calculations using a much higher rate.
“If you take a five-year fix or longer, some lenders will base the calculations on the pay rate, but most will have an affordability amount,” says Hollingworth.
“The fact that you are paying 0.94% won’t make a difference to how much they will lend, because after two years you would be due to move onto the standard variable rate, so they will look at a rate above that.”
For first-time buyers, the good news is that after a year in which deals for those with small deposits were at first pulled altogether, and then available on a very limited basis, the government’s 95% mortgage guarantee scheme seems to have kickstarted the market.
Hina Bhudia, a partner at Knight Frank Finance, says: “A price war is emerging at higher LTVs [loan-to-values], which is fantastic news for buyers with deposits of 15% of a home’s value or less.”
She has seen a “lot of movement on rates”, and says recently most of the big-name lenders have announced cuts on mortgages for buyers with small deposits.
Hollingworth says current best-buys for those with a 5% deposit are a Coventry building society two-year fixed rate at 3.25% with a £999 fee, and a Leeds building society five-year deal at 3.6% with a £499 fee.
“When they started at 95% just a few weeks ago the rates were coming in at just under 4% – so that growth in the number of lenders in the market, plus their desire to take more business, has helped bring these rates down.”
At 95% and 90% LTV, rates are still typically 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 the high LTV mortgages will keep going down,” she says.
Hollingworth says that at the lower LTVs he expects competition to keep rates down, but “I can’t see them going much lower. Maybe there will be a sliver off here and there if they can.
“That’s why the activity could be around the high LTVs as that’s where there is a bit more margin.”
Bhudia says she expects the market to remain competitive. “If HSBC gets busy and pulls its rate somebody else will come up – Santander is right behind at 1%. There’s no reason why lenders will push up rates as long as we don’t go into another lockdown and they can keep up with customer service.”
Cashback makes a comeback
With competition in the mortgage market intensifying, a growing number of lenders are trying to seduce borrowers with the “carrot” of a cashback payment.
Financial data provider Moneyfacts this week told us that the number of fixed-rate mortgage products that come with cashback has jumped by more than 70% in a year – from 735 in July 2020 to 1,263 this month.
According to Moneyfacts, the average cashback payment 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 cashback to some of its first-time buyer mortgages.
Such deals are often targeted at cash-strapped first-time buyers. But experts say it is important not to be overly swayed by freebies. The interest rates on mortgages with cashback tend to be a bit higher than on those without, so if you are tempted, you will need to do the maths.
A lot will depend on how much you are borrowing. Generally speaking, cashback deals make more financial sense on small mortgages. That said, a decent cashback payment may ease cashflow at what can often be a challenging time.
Lenders offering £1,000 include Virgin Money, Yorkshire building society’s Accord Mortgages arm, Platform (part of the Co-operative Bank) and Kensington Mortgages.
“This is a far cry from deals that were around before the financial crisis with cashback which could run to tens of thousands of pounds, but it does look like a growing trend,” says Nick Morrey, product technical manager at mortgage broker John Charcol.
Santander’s first-time buyer deals offering £1,000 cashback include two that let people borrow up to 95% of the property’s value: a two-year fix at 3.78% and a five-year fix at 3.93%. With both, there is no product fee to pay, although the maximum loan is £570,000.
Here is an example of how the maths can work, based on current two-year fixed rates at 75% loan-to-value (LTV). In terms of these deals, Virgin Money is offering the lowest rate that comes with £1,000 cashback: 1.28%. However, the lowest two-year fix at 75% LTV is a 1.07% deal from Platform that comes with £250 cashback.
IThe difference is £750 in cashback, and 0.21% in interest. For a £200,000 mortgage over two years, paying 1.28% rather than 1.07% would mean shelling out an extra £456 in repayments. That means you would be ahead financially by taking Virgin’s 1.28% deal with the £1,000 cashback. But if it was a £500,000 mortgage, you would be shelling out an extra £1,152, so in that case you would be better-off financially with Platform’s lower rate and smaller cashback payout.
This is why some people may feel that using a broker, who can look at a borrower’s individual circumstances and crunch the numbers, is a good idea. “Broadly speaking, you need to look at the proposed monthly payment, multiply it by the number of months that the deal lasts for, add on all fees and subtract any cashback,” he adds.
* All rates correct at the time of writing