Banks ‘Racing to the Bottom’ on Mortgage Rates

First-time buyers and cash-rich borrowers have benefitted from a ‘race to the bottom’ on mortgage rates as lenders battle for business.

Banks and building societies in the UK have become more confident with the market conditions and economic growth and have since launched a raft of sub-1% mortgage deals.

High-street banks such as Nationwide announced it would reduce its two—year fixed rate for borrowers remortgaging to 0.99% this week. Platform, the subsidiary of The Co-Operative Bank, has also launched a two-year fixed mortgage rate, charging 0.95%. Both deals are only available to borrowers with a 40% deposit and come with a fee of £1,499.

The reduction in interest rates has come much quicker than experts initially predicted. The milestone in the market’s post-pandemic recovery was marked when building society Hinckley & Rugby launched a mortgage with an interest rate of 0.99% in April, shortly followed by TSB with a two-year fixed rate also at 0.99%.

According to research, competition for the best mortgage rates has heated up and lenders are racing to the bottom. It is predicted that borrowers would be able to access rates as low as 0.9% in the not-too-distant future.

It was added that Platform’s market-leading rate has come out faster than what was expected. It was anticipated that lenders would slowly bring rates down to compete with TSB. However, competitors are already pitching for market share.

Property transactions are expected to exceed 15 million this year, which according to Zoopla, is the busiest year for the market since the financial crash. House prices are also setting new records, after they spiked by 10.9% in the 12 months to May.

Researchers suggest that it is highly likely that other lenders would enter the sub-1% market. However, it is recommended that borrowers assess these offers, look at the total cost and compare them on a like-for-like basis, rather than just looking at the headline rate.

Homeowners can take advantage in other ways too. As interest rates are already low, banks and building societies have loosened the rules surrounding who they will lend to, so that they attract customers or increase the amount they will lend.

Mortgage experts have said that this illustrates the huge amount of competition in the market and how lenders are clearly hungry for business. It is also telling that these deals are mainly targeting remortgages and borrowers with larger deposits, suggesting that lenders are keen to get funds out as quickly as possible: higher value loans, lower risk, and quick to complete.

The boost in lending has also benefitted savers, as banks and building societies have increased interest rates on savings accounts. This is to attract more cash from savers in order to fund new loans to homeowners.

First-Time Buyers

Those whole already own a home with large deposits are not the only buyers that are benefiting from the increased competition. Borrowers looking to secure their first foothold on the property ladder are reaping the benefits too.

Interest rates charged by lenders targeting first-time buyers with 5% deposits have come down since the Government-backed scheme launched at the end of April 2021. When the deals first returned to market, either under the official Government scheme or independently, rates were close to 4%. Some lenders are even lending at rates as low as 3.39%.

With mortgage rates decreasing, this highlights the increased competition and confidence in the market.

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