A RATE war has erupted among the UK’s biggest lenders, sending mortgage costs to new lows. Banks and building societies including HSBC, Halifax, Royal Bank of Scotland, Nationwide and Santander have all slashed their best deals in a bid to tempt wavering borrowers into taking out fixed rate mortgages.
The competition is, on the face of it, a boost for home movers and buyers at a time when the housing market shows little sign of staging any kind of recovery.
There’s a catch, however: many people applying for the loans will be told they don’t qualify. Lenders may be promoting new, cheaper rates, but what are your chances of actually getting one?
Unless you have a decent amount of equity in your home or a substantial deposit – and a squeaky-clean credit record – you’re likely to be frozen out of the best deals.
Mortgage lenders collectively reduced more than 160 fixed rate mortgages in July, with around 40 variable rate loans, including trackers, also coming down.
The latest rate war kicked off when HSBC launched a 2.99 per cent five-year fixed rate. It was the lowest five-year deal ever – until last Monday. That’s when it was trumped by Royal Bank of Scotland’s new 2.95 per cent five-year loan.
As with many of the cheapest mortgages currently on the market, however, there’s a sting in the tail in the form of a hefty charge. Not only do borrowers need 40 per cent equity to qualify for the RBS product, they must also stump up £2,495 for the fee, up from £999 on its previous rate.
Barclays, Halifax (available north of the Border through Bank of Scotland), Santander and the Nationwide and Leeds building societies are among the other lenders to have slashed mortgage costs over the past month, offering cheaper deals for both movers and buyers.
So it’s good news for borrowers, right?
Not necessarily. While lenders claim to be doing more to help first-time buyers, they are aiming squarely at those with plenty of equity in their home.
Of the recent changes to mortgage costs, 29 have been on deals requiring equity or a deposit of 10 per cent or less.
In contrast, there have been 63 changes to mortgages with a 75 per cent loan-to-value (LTV) and 47 on deals needing equity or a deposit of 40 per cent, according to Moneyfacts.
Sylvia Waycot, spokesperson for Moneyfacts.co.uk, said: “Industry experts and consumers alike will have been hoping to see the first-time buyer market rejuvenated by the Bank of England’s Funding for Lending scheme, but current evidence suggests that those in the 90 per cent or more LTV bracket are not the ones getting the best value from the rate cuts.”
As rates are cut for borrowers with ample deposits or equity, therefore, the gap between their mortgage rates and those for buyers with 10 per cent equity or less continues to widen. The best 90 per cent LTV mortgages now cost almost twice as much as the top 60 per cent LTV loans.
Alison Mitchell, mortgage expert at Edinburgh IFA Robson Macintosh, said: “Lenders cherry-pick by keeping the loan-to-value low, which isn’t a bad thing. In the past, this time of year tends to see more competition creeping into the market, lenders have their service levels in order and it’s a quick and easy way to bring in the type of new business they want.”
But it’s not just first-time buyers that are losing out. Lenders have been accused of taking the cherry-picking approach too far by restricting their best rates to all but a select group of borrowers.
Michael Maloco, of Maloco & Associates in Dunfermline, is one of several brokers reporting difficulties with getting loans approved by certain lenders.
Moving on from the agreement in principle to the actual mortgage offer is a particular problem for borrowers, according to Maloco.
“This has over the last five years become a tortuous process,” he said. “It now takes very little to cause an application to flounder, even where there is a perfectly valid explanation.”
The result in many cases, said Maloco, is that property chains collapse – not what the current housing market needs.
The other big trend is that the biggest rate cuts are on five-year mortgages.
The more people that lenders have on five-year fixed rate deals, the greater certainty their mortgage book has. The same principle applies to borrowers, Mitchell pointed out.
“I do see this as a positive approach, as many people now are looking to control their spending and want the certainty of fixed rates. Not only can they budget effectively over the coming years, they also benefit from the peace of mind that these low rates deliver,” she said.
If you do decide to jump off the fence and lock into a new deal, however, take time to work out the total cost of the deal you’re looking at.
The trouble is that the most eye-catching deals tend to come with the biggest fees, making like-for-like comparison of mortgages increasingly difficult. Don’t be deterred too easily though, said Ray Boulger, senior technical manager at broker John Charcol.
“A fee of £2,450 will instinctively put some people off. But, to put it in perspective, a £2,495 fee on a five-year fix is equivalent to the same annual amount over the deal period as a £999 fee on a two-year fix,” he said.
Also bear in mind that the larger your mortgage, the better the value you get from paying a high flat fee on a cheap interest rate.
For borrowers with access to the top deals, therefore, it’s all about avoiding hefty charges that wipe out any gains you make from the cheaper rate.
Mitchell said: “Now is the time for borrowers to use their advisers, so that in this ever-changing market they can secure the best advised deal tailored to their individual needs.”