What next for mortgage rates?
5 months ago adcity Comments Off on What next for mortgage rates?
More than 20 lenders have hiked their mortgage rates in the past month as fears of an imminent rise in the base rate grow, prompting experts to call time on record low cost homeloans.
Barclays, Halifax, digital bank Atom, NatWest and building societies Nationwide, Skipton and West Bromwich have all increased the cost of their mortgage deals in the past week.
The average two-year fixed rate has bumped up 0.04 per cent to 2.24 per cent since 1 October, according to data from Moneyfacts.
It marks a turnaround in the direction of travel for the cost of mortgages, which have been at rock bottom for more than a year.
It’s still possible to secure a two-year fixed rate under 1 per cent, but these eye-catching deals aren’t likely to be around for much longer.
Swap rates – used by lenders as a factor in pricing mortgage rates – have risen following increasingly insistent warnings from the Bank of England that a base rate rise is likely to come sooner rather than later.
Concern over mounting levels of consumer debt and persistently above target inflation are both piling on the pressure to lift the base rate from its historic low of 0.25 per cent.
Markets are now expecting a rise to come far sooner than expected, with some economists predicting that the Monetary Policy Committee could vote for a hike at its November meeting.
Home owners are being offered the chance to lock into record low fixed rates
For now, rates remain at their lowest ever – even for those with smaller deposits.
Top of the table is a 0.99 per cent two-year fixed rate from Yorkshire Building Society which comes with a £1,495 fee and is available to those with a 25 per cent deposit or equity to put in.
About what next for mortgage rates?
This is our long-running mortgage rates round-up that looks at the mortgage market and what to consider when looking for a loan.
It has been running for more than five years and is regularly updated.
Older reader comments are left in place, so people can see what was being said in the past.
The best of the rest of the two-year fixes for those with big deposits come in at just above 1 per cent.
Those looking for longer term security in the form of a five-year fix can trade that for a slightly higher rate of around 1.6 per cent from a slew of lenders including Sainsbury’s Bank, Yorkshire Building Society and HSBC.
Even those with a 10 per cent deposit can access historically very low rates. The Co-operative Bank has a two-year fix at 1.79 per cent for them, while Chelsea Building Society offers 1.83 per cent.
Over five years they can fix at 2.45 per cent with Hanley Economic Building Society and 2.49 per cent with Co-op.
The very best and cheapest deals on offer are for those with a substantial whack of equity to put in but there are competitive rates across the board, even for those with just a 5 per cent deposit.
It’s therefore worth thinking about remortgaging if you’ve come to the end of your deal and are sitting on your lender’s standard variable rate.
These rates average at around 4.75 per cent – considerably higher than the competitive rates available for newer deals.
You can check best buy tables and the best mortgage rates for your circumstances with our calculator powered by London & Country.
What are the best mortgage deals?
The attraction of a two-year fix may be lower rates now and extra flexibility, but that comes at the expense of needing to remortgage in two years to avoid slipping onto a more expensive standard variable rate.
And with the base rate at just 0.25 per cent, there is really only one direction for rates to go in future – up. A five-year fix gives the opportunity to lock into a low rate for a longer period and avoid extra fees and higher rates in a relatively short time.
Unless you have a good reason to take a two-year fixed rate, such as needing to move or expecting to have to sell your home, brokers have suggested that five-year fixed rates might be a cheaper long-term bet.
Even if the base rates stays low, if lenders are worried about the effect of Brexit, they are likely to make it harder for borrowers to get a mortgage by making their affordability and income tests harder to pass.
Whatever the right type of mortgage for your circumstances, shopping around and speaking to a good mortgage broker is a wise move.
Borrowers should have a quick look at the rates below, these are regularly updated by This is Money’s mortgage team. If you spot a deal you think has been pulled or should be in there, email us via email@example.com with mortgage rates in the subject field.
For a full rate check use This is Money’s mortgage finder service and best buy tables, these are supplied by our independent broker partner London & Country.
Best fixed rate mortgage deals
Bigger deposit mortgages
Five-year fixed rate mortgages
Yorkshire Building Society has a five-year fixed rate mortgage at 1.55 per cent with £1,700 fees at 65% loan-to-value
HSBC has a five-year fixed rate mortgage at 1.59 per cent with £999 fees at 60% loan-to-value
Sainsbury’s Bank has a five-year fixed rate mortgage at 1.59 per cent with £745 fees at 60% loan-to-value
Two-year fixed rate mortgages
YBS has a two-year fixed rate mortgage at 1.09 per cent with £245 fees at 65% loan-to-value
Sainsbury’s Bank has a two-year fixed rate mortgage at 1.09 per cent with £745 fees at 60% loan-to-value
Mid-range deposit mortgages
Five-year fixed rate mortgages
Sainsbury’s has a five-year fixed rate mortgage at 1.69 per cent with £745 fees at 75% loan-to-value
Co-op Bank has a five-year fixed rate mortgage at 1.74 per cent with £1,754 fees at 75% loan-to-value
HSBC has a five-year fixed rate mortgage at 1.74 per cent with £999 fees at 75% loan-to-value
Two-year fixed rate mortgages
YBS has a two-year fixed rate mortgage at 0.99 per cent with £1,495 fees at 75% loan-to-value
Hanley Economic has a two-year fixed rate mortgage at 1.12 per cent with £745 fees at 75% loan-to-value
YBS has a two-year fixed rate mortgage at 1.13 per cent with £1,200 fees at 75% loan-to-value
Smaller deposit mortgages
Five-year fixed rate mortgages
Hanley Economic has a five-year fixed rate mortgage at 2.45 per cent with £999 fees at 90% loan-to-value
YBS also has a five-year fixed rate mortgage at 2.49 per cent with £1,200 fees at 90% loan-to-value
Co-op Bank has a five-year fixed rate mortgage at 2.49 per cen
t with £1,754 fees at 90% loan-to-value
Two-year fixed rate mortgages
Co-op Bank has a two-year fixed rate mortgage at 1.79 per cent with £1,754 fees at 90% loan-to-value
YBS has a two-year fixed rate mortgage at 1.89 per cent with £1,900 fees at 90% loan-to-value
Chelsea BS has a two-year fixed rate mortgage at 1.83 per cent with £1,900 fees at 90% loan-to-value
Best tracker rate mortgages
A note on rates
Rates can change on mortgages at short notice and sadly lenders do not always inform us when they alter them (especially if they raise rates rather than lower them).
This can lead to occasions when the rates listed here are not available. If you ever spot this situation – or a good rate we have not listed – please email firstname.lastname@example.org with mortgage rates in the subject line and we will update the round-up asap.
Tracking a 0.25 per cent base rate may seem an odd decision when rates are likely to only go up – and you could fix for up to five years at a lower rate – however, there is one big advantage to a good lifetime tracker, flexibility.
A fixed rate mortgage will almost inevitably carry early repayment charges, meaning you will be limited as to how much you can overpay, or face potentially thousands of pounds in fees if you opt to leave before the initial deal period is up.
You should be able to take a good fixed mortgage with you if you move, as most are portable, but there is no guarantee your new property will be eligible or you may even have a gap between ownership.
A good lifetime tracker has no early repayment charges, you can up sticks whenever you want and that suits some people.
Make sure you stress test yourself against a sharper rise in base rate than is forecast.
Coventry BS has a lifetime base rate tracker at 1.39 per cent with fees of £999 at 50% loan-to-value. An offset version has a 1.59 per cent rate
The society also has a lifetime base rate tracker at 1.75 per cent with a £999 fee at 85% loan-to-value
Nationwide has a five-year tracker at 1.69 per cent, or base rate plus 1.44 per cent, with £999 fees at 60% loan-to-value
HSBC has a two-year tracker at 0.99 per cent + base rate (0.25 per cent), with £999 fees at 85% loan-to-value. It has no early repayment charges
What is happening with interest rates?
The Bank of England has a target, set by Government, to keep inflation at around 2 per cent.
Having been below this rate for some time, giving the Bank plenty of room to leave the base rate on hold, inflation has more recently ticked up.
Most recently, the Office for National Statistics revealed consumer price inflation hit 2.7 per cent.
Economists have started to warn that this direction of travel could prompt the Bank to hike the base rate as soon as November.
The base rate isn’t the only influence on mortgage rates though and longer-term swap rates can regularly shift on money market sentiment, without any central bank moves.
> Read: When will interest rates rise? Our round-up of the latest thinking
Can you get a mortgage?
Banks and building societies have broadly got to grips with the tougher new mortgage rules introduced more than three years ago in April 2014.
But getting a mortgage is tougher than it once was. You will need to get your finances in order and be prepared for the lengthier application process and in-depth affordability interviews getting a mortgage requires nowadays.
Lenders also apply different standards to what they will lend.
Weigh up the above, check the rates here and in our best buy mortgage tables, have a scout around what the best deals look like – and speak to a good independent broker.
There are a couple of things to look out for if you do decide to fix.
You need to check the bumper arrangement fees are worth paying – if you don’t have a big mortgage you may be better off with a slightly higher rate and lower fee.
It’s also wise to think carefully about whether you expect to move home soon. A good five-year fix should be portable, so you can take it with you.
But your new property will need to be assessed and you might need to borrow extra money, and so your lender could still say no. Getting out of a fixed rate typically requires a hefty hit to the pocket from early repayment charges.
Today’s low rates may stick around, they may even inch a little lower, but they may also be swiftly axed.
If you think you’d kick yourself if you miss out on one, then set aside some time to consider what to do.
TWO VS FIVE-YEAR FIXED RATES
The margin between five-year and two-year fixes has trimmed but a shorter fix remains cheaper.
However, at the end of a two-year fix you will move onto a lender’s more expensive standard variable rate, most of which could rise any time and many certainly will when rates go up.
Remortgaging again will mean another set of fees and be warned you may end up coming off a two-year fixed rate as criteria are tightening. Brexit should happen within two years of the end of March 2017, which could create economic uncertainty and limit lender appetite. This is why This is Money prefers five-year fixes.
However, if you think you will move in that period you may face large early repayment charges if your mortgage cannot go with you.
True cost mortgage calculator
This mortgage payment calculator will allow you to see the effect of sneaky arrangement fees on your repayments. Use the second part of the calculator to compare deals.
What decides mortgage rates?
Mortgage rates and savings rates are part of a complex financial web that draws on official lending costs, ie base rate, money market funding costs, and competition for savers’ deposits.
The traditional influence on fixed rate mortgages over the past decade has been swap rates, the cost of obtaining fixed term funding on the money markets for lenders.
Meanwhile, the traditional influence on tracker rates over the same period has been Libor, the cost of floating rate funding on the money markets.
Banks use savings deposits to back mortgages as well as money market borrowing, while building societies are limited in how much of the latter they can use.
Typically money market costs tended to move in line with the Bank of England’s base rate, with Libor about 0.1 per cent above it and swap rates reflecting what the market thinks interest rates will be over a set period of time, ie two years, five years etc.
The credit crunch put paid to this relationship temporarily, but things then returned almost back to normal.
Generally, a rise in Libor or swap rates will push up mortgage costs and a fall will allow lenders to cut them.
But mortgage lenders’ levels of confidence and their access to funding are equally important to rates. Things were pretty tight here for quite some time after the financial crisis and that kept rates relatively high.
The pick-up in the property market and the economy, along with a healthier outlook for banks and building societies has boosted confidence. Rates are now at exceptionally low levels but mortgages are harder to get than they once were.
Lending is a long way off the easy credit days of pre-2007 – and rightly so.
Choosing a mortgage – the essential quick guide
1. How big a deposit do I need?
To get the full choice of deals raising a decent deposit is still vital. The benchmark figure is 25 per cent, if you have this then you’ll be getting close to the best rates, although for an absolute cheapest deal you’re still likely to need 40 per cent.
However, a selection of better deals for smaller deposits is also now available.
2. Should I take a fixed rate?
The consensus is that there will be no dramatic sudden interest rate increases. However, these forecasts are no guarantee that rates won’t rise and when rates do rise trackers will get more expensive. [Remember almost no one forecast base rate heading down to 0.25 per cent]
Borrowers needing security should consider the extra cost of a fix as worthwhile. If you are taking a tracker because you couldn’t afford the equivalent fixed rate then you are putting yourself in a very dangerous position.
If you decide to take a fix you need to carefully consider how long for. Two-year deals are cheap but only offer very short-term security and incur extra costs when you remortgage. Five-year deals lock you in for longer and come with slightly higher rates but better security and no need to remortgage in a relatively short space of time.
3. Should I take a tracker rate?
Tracker rates are essentially they are a gamble. What looks like a bargain rate now, could soon get very expensive when interest rates rise.
Anyone considering a tracker needs to make sure they are not just storing up a problem for the future. If the tracker comes with an early redemption penalty that would make it expensive to jump ship, then make sure your finances could take a rise of at least 2 per cent to 3 per cent in interest rates.
For that reason we at This is Money like tracker deals that fit into one of these three categories: no early redemption penalties, a cap to how high the rate will go, or that let you jump ship for a fixed rate if rates rise.
4. Should I get off a standard variable rate?
Standard variable rates are what borrowers slip onto by default when they finish a fixed or tracker deal period.
They can typically be changed by lenders at any time – without the Bank of England moving rates, they may also rise or fall by more than any move in base rate.
A number of mortgage borrowers have fallen victim to lenders hiking their standard variable rates in recent years, despite the base rate remaining stable.
Never forget than without a Nationwide-style base rate lock guarantee, your SVR could be hiked at any time, as could a discount rate linked to it.