UK lending giants have scrambled to attract customers after the pandemic, resulting in the cheapest fixed rate mortgages on record.
We take a closer look at the recent wave of super cheap fixed rate offers and what they mean for homebuyers and remortgagers.
What’s the last one?
Nationwide has reduced the cost of its line of 2 year fixed rate mortgages, offering an offer priced at just 0.91% for borrowers with a 40% deposit. It comes with a fee of £ 1,499 and is available for movers and remortgagers.
For the same deposit and the same fees, the lender also offers the option of fixing for five years at less than 1% with a 0.99% deal.
In terms of rates, they are now the cheapest two and five year fixed rate mortgages available. Lower and free options are available, however, for slightly higher rates.
Nationwide’s offers are the latest in a wave of fixed rate mortgage cuts. Earlier this month, HSBC launched a two-year patch priced at 0.94% for an arrangement fee of £ 999. There is also a no-charge option, with a higher interest rate of 1.14%.
The TSB also unveiled a two-year fixed rate mortgage at the same 0.94% and a slightly lower fee of £ 995. This one comes with a choice of free legal fees or £ 300 cashback.
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Why are the cost of fixed rate mortgages so low?
Lenders are tripping over themselves to lure customers back through their doors in an unusually buoyant “post-pandemic” real estate market.
Average house prices are almost 9% higher than at the same time last year, in part due to a push to exceed the stamp holiday deadline (in England and Northern Ireland ) September 30. Coupled with the Bank of England’s base interest rate at a constant 0.1% floor, this means mortgage lenders are both able and willing to deliver deals that make the headlines.
While Nationwide, TSB, and HSBC are at the top of the market, there are plenty of other fixed rate mortgages priced below 1% including those from Santander, NatWest, and some smaller construction companies.
Who Can Benefit From Inexpensive Patches?
However, not everyone will be given the green light for these super cheap deals. Some, like with the TSB offer, are only available to remortgagers and not to homebuyers, while all cap loans at a maximum of 60% of the property’s value. This means that you will need a large deposit of 40% to deposit.
You will also need an excellent past credit management record, which lenders will check against your credit report. Even a minor mistake could exclude you from these great offers.
What would my mortgage payments be?
Re-mortgage away from a typical variable standard rate (SVR) loan at a very cheap fixed rate can save a fortune in monthly repayments.
Take, for example, a 25-year £ 200,000 repayment mortgage. Paying a lender’s typical SVR (4.4% according to Moneyfacts) would cost £ 1,100 in monthly repayments. Lower that rate to 1% and refunds drop to £ 753, a savings of almost £ 350 per month.
What should I watch out for?
However, the cheapest patches come with an arrangement fee and these should be factored into the monthly savings. Nationwide’s cheapest two-year patch comes with a fee of £ 1,499, which works out to £ 750 for each year of the deal.
Especially if your mortgage is smaller, it may be more profitable to opt for a slightly higher rate in exchange for “no charge”. Keep in mind that if you go for a two-year fix instead of a five-year fix, for example, when the rate is cheaper, you’ll pay an arrangement fee more frequently.
If you are tied to your current mortgage contract, you will have to pay prepayment charges which can make the switch, even at a much cheaper rate, a false economy.
Likewise, any new fixed rate mortgage will have links. For example, HSBC charges 2% of the outstanding loan in the first year and 1% in the second year for its 0.94% contract, if you want to leave. Joining a fixed rate requires the certainty that you will not buy back the mortgage (sell your house for example) during the fixed rate period.
However, mortgages are generally transferable, which means that you can transfer the loan to another property, as long as the lender considers it adequate security. This would avoid the early redemption charge.
I am still tied to my current mortgage. What can I do?
Many lenders will reserve a mortgage offer for you for a period of three to six months. So if your current mortgage contract comes to an end within that time frame, it is definitely worth your while to find out and potentially lock in the rate.