Record low rate signals mortgage battle

By Kevin Peachey
Personal finance reporter

  • Published
Monopoly piece on coinsImage source, Getty Images

A record low mortgage rate is the latest sign of lenders battling for new custom, but experts say the small print of deals requires careful examination.

The Yorkshire Building Society, the UK's second largest mutual, has launched a mortgage at a rate of 0.89%.

Experts point to the relatively large fee, a big deposit, and potential changes to the rate - saying the deal would not suit many homeowners.

Lenders are seeking custom as property sales remain static.

The latest figures from HM Revenue and Customs (HMRC) show that, on a seasonally-adjusted basis, property transactions have generally been close to the 100,000 mark each month for the last three years.

The exception was a surge to 173,860 in March last year, ahead of the introduction of a 3% stamp duty surcharge on the purchase of any additional buy-to-let properties or second homes.

Since that surcharge came in, the buy-to-let market has become more subdued, as has the market for home movers. The Council of Mortgage Lenders (CML) said this fall had been cancelled out by a pick-up in lending to first-time buyers but, overall, the UK's housing market was in "neutral gear".

This climate, in part, has resulted in lenders launching new products to try to attract new borrowers. At times these deals have been fully subscribed and pulled within days.

"We are seeing newer lenders competing to top the best buy tables. The banks and building societies are battling to attract new borrowers and they are tempting customers in with their cheapest ever mortgages," said Aaron Strutt, of mortgage broker Trinity Financial.

"Most experts thought that rates could not get any better, although they are still coming down."

Small print

Launching its 0.89% mortgage, the Yorkshire Building Society said it had been able to offer the record low rate owing to the cost of funding having fallen in recent weeks.

However, there are significant additional costs that would make the deal less suitable for many borrowers, including those with small loans and first-time buyers, experts say.

There are a number of relatively cheap fixed mortgage deals on the market at the moment, but the Yorkshire deal is variable, so the rate could change.

There is a comparatively high product fee of £1,495 that would have to be paid on completion and new customers would have to pay for a property valuation and legal fees.

The loan also requires a deposit of at least 35% of the property's value which, for the average home, amounts to about £76,000.

After two years any customer who does not move to another mortgage would pay the lender's standard variable rate of 4.74%.

Rachel Springall, of financial information service Moneyfacts, said that conditions meant the deal would be most attractive to homeowners with access to a large deposit or equity, and who are applying for a large loan.

Meanwhile, the CML has called on the Bank of England to relax the requirements of affordability tests for those applying for a mortgage owing to less activity in the UK housing market than previously predicted. In other words, there is less risk of a housing bubble than had been anticipated.

"We continue to believe that macro-prudential policy could be re-calibrated, especially around affordability tests, in a manner that would deliver a modestly stronger and broader mix of activity, without undermining financial stability," the CML said.