Fixed-rate mortgages have been slashed by some leading UK home loan providers.
Santander reduced the rate of its two- and three-year fixed mortgages by up to 0.3 percentage points, while Northern Rock improved its fixed rates by up to 0.5 percentage points.
Home loan providers pushed shorter-term fixes recently after they became less popular when rates increased, following an impending rise in the Bank of England base rate. Those fears disappeared after weak economic data, leading to the emergence of attractive headline rates on two-year fixes.
However, the mortgages provide only short-term security and if rates increase in the next two years, borrowers are expected to re-fix at a higher rate when the transaction expires.
“The shorter the timeframe, the less risk there is of significant rate rises and hence for clients in this category there is often a strong case for choosing a variable rate, either a tracker or a discount off the standard variable rate, to take advantage of the lower rates initially offered by such mortgages,” said Ray Boulger of John Charcol.
Meanwhile, Jule Wilson at Northern Rock argued that the group’s “switch-to-fix” mortgage, Freedom to Fix, is becoming popular because “the uncertainty has allowed us to be creative. Our two-year Freedom to Fix tracker is doing well because it allows borrowers to track the base rate plus 2.08 percent (making a current 2.58 percent) for two years but also to switch to a Northern Rock fixed rate without incurring an early repayment charge.”
“The market is very active right now, so we’ve been cutting rates to remain competitive.”
Switch-to-fix mortgages provide flexibility but normally come at a higher price. Northern Rock’s two-year deal is more expensive than its tracker product, which is currently 0.1 percent to 2.48 percentage points lower than the Freedom to Fix mortgage.
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