Mortgage lending is still far from the free-for-all experienced in the property boom-time of the early noughties, but the first few weeks of 2010 have seen lenders getting a bit more interested in vying for custom. Fixed rate deals have seen the biggest cuts with Yorkshire Building Society being top of the list with a 0.6% cut on its two-year fixed rate mortgage. Nationwide, Woolwich, Halifax, HSBC, Santander, and ING Direct have also lowered their rates.
The mortgage market was very stale last year, so some early New Year competition has been welcomed. Trackers remain a much better deal than fixed-rate deals; around 1.5% cheaper on average. As always seems to be the case these days, the best rates are reserved for the buyers with the biggest deposits (25-40%), but rates for buyers with a more reasonable (10%) deposit are coming down slightly.
Tracker or Fixed?
Not everyone will have the luxury of being able to chose, but a very pertinent question in the current market, with interest rates at an all time low, is whether to get the security of a fixed rate deal or go for a tracker mortgage. Obviously trackers are where it’s at right now, but if interest rates go up, then borrowers on a decent fixed rate may end up better off. General consensus among financial gurus suggests that nothing too dramatic will happen in 2010 – they may go up to 1.5% at the most, but who knows what might happen between now and December?
When interest rates go up, which they will certainly do sooner or later, is could be a doubly good thing for those on fixed rate mortgages. An increase in the base rate of interest would suggest that the economy is in better shape and would therefore increase competition in the fixed-rate market, driving their rate down. Remember, fixed-rate mortgages are based on the swap rate (the cost of fixed-term funding on the money markets) rather than being directly linked to the Bank of England interest rate, like tracker deals.
Having a tracker mortgage is obviously the best deal on the market right now with the base rate at an historical low of 0.5%, but it is essentially a gamble. Most trackers will charge a rate of interest about 2.5% above the base rate, so if the base rate was to increase to 2.5% (still a very low rate in historic terms), then the mortgage on which you were paying 2.99%, suddenly becomes 4.99% and doesn’t look such a good deal anymore.
It’s not all good news in the mortgage market though – especially if you’re a customer of the Skipton Building Society. The fourth biggest mortgage lender in the UK had an agreement with its customers that said they would never pay 3% more than the interest base rate. However, from February, instead of paying 3.5%, its borrowers will be paying 4.95% interest on their loans. In real terms, that means that someone with a £100,000 pound mortgage will be paying an extra £81 per month. It must have been a bad New Year in North Yorkshire.