How to be on the winning side as mortgage war hots up

Just a week after launching what was described as “Britain’s cheapest-ever” mortgage deal, Atom Bank withdrew its 1.29% five-year fixed rate, amid massive demand.

Although this offer was for borrowers with a 40% deposit, and came with a £900 fee, there was no shortage of takers.

The loans are an illustration of the competition among mortgage providers. At the start of this month, HSBC dropped rates for a number of products, offering 1.69% for a five-year fixed-rate loan – again for those with 40% of the value of the property in the bank.

The offers are quite a change for homebuyers – especially those getting on the ladder for the first time. Over the last five years, the number of deals for buyers with a 5% deposit has gone up by 200, according to Rachel Springall from Moneyfacts.

And what a change it is. “At the beginning of this decade, you couldn’t get a mortgage even with a 10% deposit, let alone 5%,” says Ray Boulger of broker John Charcol.

So in this new mortgage war, what are the best options out there for homebuyers?

First-time buyers

The more you have, the better the rate. Most first-time buyers will not have the bulky deposit required to get the very best rates on the market – Springall says the average two-year fix with a 40% deposit has a rate of 1.83%, while those with a 5% deposit come at 4.2% – but that does not mean they will be completely excluded from the benefits of competition.

“Now there are a lot of lenders who offer mortgages to those with only a 5% deposit, but there is more choice and at much lower rates for those with a 10% or larger deposit,” says Boulger.

David Hollingworth from London & Country Mortgages illustrates how saving for a bigger deposit can result in lower rates: “For example, the lowest two-year fixed rate to those with a 5% deposit is from Nottingham building society at 2.99% with a £999 fee.

“Those with a 10% deposit could get a rate as low as 1.88% from Chelsea building society, although that does carry a big fee of £1,695, so I would prefer the Leek United building society product at 1.90% (with 10% deposit) plus a £995 fee, as a closer comparison.”

Springall, meanwhile, recommends a deal from Post Office Money at 3.83% for two years for borrowers with a 5% deposit – including a free valuation and £500 cashback.

Trading up

Moving on from one home to the next frequently means buyers will take with them a reasonably good deposit. Since the deals are there for those with bigger deposits, there is little point in waiting for them to improve, says Jonathan Harris of mortgage broker Anderson Harris. “Rates are so low that there does not seem much point in holding off in the hope that they will fall slightly further.”

If the move is to a “forever home”, some may want to lock into long-term fixed-rate loans, like the one from HSBC launched earlier this month, says Hollingworth.

“Those that are happy to lock in for even longer might decide to batten down the hatches and opt for a 10-year fixed rate,” he adds, highlighting Coventry building society, which has a 10-year fix for 2.39% – but with a deposit of half of the value of the property needed.

“Barclays has a 10-year fix at 2.69% for borrowers with 20% equity and charges a £999 product fee. It also comes with a free valuation for house purchase customers,” says Springall.

“Those who don’t want to tie into a decade-long fixed rate could, instead, choose a five-year fix. Santander offers a deal priced at 2.14% with £250 cashback and free valuation, plus its product fee of £999 can be added to the advance of the mortgage.”

Remortgaging

Customers remortgaging their properties can benefit from some incentives as lenders recognise that they do not want to be hit with high costs for switching.

“So many mortgage options carry a free valuation and free basic legal work to effect the switch to the new lender,” says Hollingworth.

Borrowers should look at both their existing lender and also see what else is available, says Boulger. “Product transfers, where the amount and term are not being changed, generally have the benefit that no new underwriting is required, and so the process is normally quicker. However, a better deal may well be available by remortgaging.”

At the end of the natural life of their current deal, customers may be offered a new deal from their existing provider – but it is still worth shopping around no matter how easy this may appear, says Springall. “Sainsbury’s Bank offers a great deal priced at 1.34%, fixed for two years for those with 20% equity, and it comes with a free valuation and free legal fees, plus the £995 product fee can be added to the mortgage advance.”

Buy to let

In April, the first of a series of tax rises came in that increased costs for landlords with buy-to-let mortgages. This has prompted a drop in lending.

Unsurprisingly, rates for buy-to-let mortgages have never been so competitive. But they are not always available, says Harris. “Accessing them has never been so challenging. Lenders are applying ‘stress testing’ at notional rates way above the actual pay rates of the mortgage and looking for rental cover of up to 145%,” he says.

Despite this, it may still be an appealing investment for some looking at the long term. “With low mortgage rates, buy to let can still be an attractive investment, especially if bought through a limited company, but not everyone wants to devote the time necessary to run what is a business,” says Boulger. “Buy to let has to be looked at as a long-term investment and it will appeal most to those who expect to see property prices rise over the next few years.”

Trackers

For those on a tracker mortgage, timing is everything. While rates are at a historic low, is now the time to lock in for a fixed mortgage?

David Blake, from Which? Mortgage Advisers , says we are in an “unprecedented economic climate” with an unpredictable future, prompting many to look at the benefits of fixing their rate for five or 10 years.

If those on trackers are moving, the key is to do so before the rest of the market does so.

“Assuming the margin is competitive, a tracker mortgage is likely to continue to be good value for at least another year or two,” says Boulger, “but borrowers with a tracker often wait until the bank rate has increased before switching to a fixed rate. By then, it is too late because the market will anticipate the increase and fixed rates will rise before the bank rate does. The message is: don’t leave it too long.”

Hollingworth says borrowers with trackers can prepare for rates going up. “They could overpay to drive down the mortgage more quickly and make the low rates work harder. That will also help once rates do start to climb as they will have a smaller mortgage.”