Why a lending ‘race to the bottom’ is giving you lower mortgage rates

The housing market has enjoyed a buoyant start to 2020, thanks to the so-called post-election ‘Boris bounce’ and continued low interest rates.

Recent figures from UK Finance showed that UK banks approved the highest number of mortgages for a decade in 2019, with almost a million home loans approved by high street banks last year.

2019 also marked the highest annual total for mortgage approvals since the global financial crisis. One of the reasons for this is that a price war between lenders has been pushing down the cost of mortgages, particularly for first-time buyers. Keep reading to find out more.

Competition between lenders resulting in lower rates

In 2019, strong competition between mortgage lenders for new business saw many banks and building societies cut rates in a ‘race to the bottom’.

FT Adviser reports that the average mortgage rate for a 10-year fixed mortgage stood at a record low of 2.76% at the end of November 2019. The average two-year fixed rate has been below 2% for borrowers with a 40% deposit over the past year. And, the cost of five-year fixes also declined steadily throughout 2019.

The mortgage price war has been a big help to first-time buyers, as the rates on higher loan-to-value mortgages have been cut by more than the rates on other types of borrowing.

Research by financial analyst Moneyfacts found that rates on deals that required a small deposit fell significantly in 2019 as lenders competed for first-time buyer business.

For example, the average two-year fixed rate for borrowers with a 5% deposit fell by 0.22% in 2019, from 3.46% in January to 3.24% at the end of December. Meanwhile, the average five-year fixed rate at 95% loan-to-value fell from 3.86% in January 2019 to 3.55% in December 2019.

Darren Cook, Finance Expert at Moneyfacts, said: “Those borrowers who can only manage to raise a 5% deposit have seen the max 95% loan-to-value average rate fall significantly for two, five and 10-year fixed deals. This is fantastic news for prospective first-time buyers who have been planning and saving up to get their foot on the property ladder in 2020.

“There has been a concerted drive by mortgage providers during 2019 to try and secure the business of potential first-time buyers, who are the lifeblood of the mortgage and property markets, and it is encouraging to see rates decrease as a result of some healthy competition.”

Why are interest rates falling?

One of the reasons that interest rates for mortgages remain low relates to a change in banking regulations that came into force in January 2019.

Under new Bank of England rules, there is now a ‘fence’ between a bank’s investment operations and their lending arm. This was designed to ensure that institutions are still able to lend (and that money belonging to customers is safe) even if there was a shock to the banking sector.

This so-called ‘firewall’ means that capital which could previously have been used to back risky investments is now ringfenced in retail banks. So, with lots of capital available, lenders are using this cash for mortgages. This has helped to bring down lending rates.

Don’t forget to check the fees before signing up for a deal

With so many low rates in the market, competition between banks and building societies remains fierce. Clearly, this is great news if you’re a first-time buyer, you’re moving home or you’re looking to switch your mortgage.

However, when comparing the lowest rates available in the market, it’s important that you also consider the fees that are associated with each product.

Some lenders are able to charge a very low interest rate on mortgages by applying very high fees for the deals, with fees in excess of £1,000 commonplace. In some cases, fees can be as much as £2,500.

It’s important to consider fees because:

  • They may be added to the mortgage and so you could end up paying interest on them for many years
  • A high fee could make a mortgage product uncompetitive when compared to another product. In some cases, it may be more cost-effective to choose a mortgage deal with a higher interest rate and a lower fee, as this could work out cheaper overall.

A mortgage broker can calculate the cost of various deals to work out which is the most appropriate for your circumstances.

Get in touch

If you want to take advantage of the low interest rates currently available, please get in touch. Email enquire@london-money.co.uk or call (0207) 808 4120 to find out more.