It’s lucky days for homebuyers who are looking for a short term, low-cost mortgage rate, as competition amongst lenders increases, driving down mortgage rates.
Several providers have launched attractive price mortgages in the past few weeks, suggesting that the month of January will see a continuous downward trend of mortgage pricing.
Latest data from the Bank of England shows that the average interest paid for a two-year fixed rate mortgage that requires a 25 percent deposit was more than 4 percent in December.
The gap is also opening up the price between the two-year and five-year fixes. The five-year fixed rates on the same loan-to-value (LTV) dropped slightly last month, at 5.67 percent higher than in May.
By contrast, the tracker rates have stayed almost static for the past few months. Ray Boulger, a mortgage adviser at John Charcol said that rates are driven down by competition between lenders and the way the loans are funded.
"Lenders are far less dependent on swap rates for their new funding, rather [they are] looking towards their savers to balance the books," he said. "Also, lenders are becoming more comfortable with the wider economy, most notably the bounce in house prices and the expectation that interest rates will remain low for some time, resulting in far less repossessions than initially expected."
Yorkshire building society was one of the lenders who launched cheap short-term fixes last week. Typically, it launched a one-year fixed rate loan, which was considered to be the cheapest rate for the term at only 3.19 percent. This came with a £195 fee and a 75 percent LTV. Its two-year fixed rate was at 3.79 percent, with a £495 fee on the same LTV.
While this is good news for borrowers, it has come at the expense of savers, said data provider Moneyfacts.
Just before November last year, demand for savers’ money fuelled the rates, but since then, saving rates have declined and are now back to the levels seen last summer. The five-year fixed rate bonds, in particular, have suffered the most, with rates plunging from 4.77 percent in November to 4.54 percent today.
“Savers’ money was in high demand during 2009, leading many banks and building societies to offer rates as much as 10 times the base rate," said Moneyfacts.co.uk spokeswoman Michelle Slade. "Providers must strike the right balance between savers and borrowers in order to maintain their balance sheets. The focus appears to have switched back to lending and as the demand for savers’ money reduces, so do the rates offered."