Moneyfacts UK Mortgage Trends Treasury Report, not yet published, shows that the average overall fixed rates for both two and five-year mortgage deals have had only minor fluctuations of just 0.01% or 0.02% each month this year. On that basis, you would be forgiven for thinking that the mortgage market has remained static in 2020 but, on closer analysis, this does not appear to be the case.
Knowing that providers have been making changes to their product ranges, and that these are having little impact on the average rates offered, it stands to reason that amendments are being made to other parts of the deals offered as well.
Focusing on the top 10 lenders (as per UK Finance data for Largest Mortgage Lenders assessed by gross lending), we have explored changes within the true rate offered. The true rate refers to an assessed combination of the initial interest rate and the product fee charged, based on an advance of £150,000, over the initial period. We have focused on two and five-year fixed rate deals in the 75% loan-to-value (LTV) bracket.
Eleanor Williams, Finance Expert at Moneyfacts, said: “As our data shows, the majority of the top 10 mortgage lenders have made reductions to the true rates on their two and five-year fixed rate deals at 75% LTV in this early part of 2020. This covers where the interest rates themselves are being amended, but also takes into account changes to the fees charged, with some true rate reductions as high as 0.14% within the last month.
“With consumers becoming increasingly savvy, many are aware that interest rates are at historic lows for mortgages, and so the next logical step for them is to consider the overall package of a deal. With some fees in this sector currently as high as £2,000, or more, borrowers need to be careful that they are not swayed by just a tempting rate and should carefully consider the total deal they are taking on. This is particularly true on shorter-term deals; for a two-year fixed mortgage, the borrower will only have 24 monthly repayments over which to recoup the difference between the repayment required on a lower rate deal with a high fee, and the monthly payments they would make on a higher initial mortgage rate but with a significantly lower, or in some cases no fee.
“This caution would be even more important for those who do not have the savings to cover a fee payment upfront, and therefore might consider extending their mortgage borrowing in order to pay this, and paying interest on that fee moving forwards, on top of their existing mortgage balance.
“It is encouraging to see reductions from so many providers, whether these shifts are being applied to the interest rates themselves or to the overall package offered. Considering that UK Finance figures show that gross mortgage lending declined by 0.4% in 2019, it demonstrates how keen lenders are to compete for business despite ever-tightening margins, and it also implies that they are keeping in mind that borrowers are now enticed by more than just a low interest rate.
“Looking forwards, what is also of interest is that SWAP rates have continued their decreasing trend over the last month, with the two-year SWAP reducing by 0.17%, while the five-year SWAP rate has dropped by 0.16% – now standing at 0.49% and 0.50% respectively. Traditionally, falls of this nature are expected to slowly filter through to the wider markets, and there is generally hope that average mortgage rates may reduce even further in line with a SWAP rate decrease.
“However, as we have established that overall average rates appear to be stagnant despite the SWAP rates decreasing in the last couple of months, this begs the question as to whether these rates might have already reached their lowest point. If this turns out to be the case, then the result of this month’s Monetary Policy Committee decision on whether or not to cut the base rate is potentially one that should not be holding mortgage borrowers back from moving forwards in search of new deals.
“As with any financial commitment, it is vital that borrowers take into account the overall cost of any deal they are considering and make sure that what they are committing to will be affordable over the long-term. Talking with an independent financial adviser about the various options would be wise.”
Please note: Lenders used for comparison are the top 10 lenders according to UK Finance data for Largest Mortgage Lenders by gross lending.