Fixed-rate mortgage deals tumble to less than 1.15%
Some lenders are now offering interest rates of below 1.15% on two-year fixed-rate mortgage loans. We explain why.
Borrowing costs for banks and building societies have fallen in response to the coronavirus lockdown.
This has resulted in a respective dip in the cost of fixed-rate mortgage deals.
Best-buy two-year fixed-rate mortgage deals have tumbled to below 1.15%.
HSBC is now offering a two-year fixed interest rate of 1.14% for people with a 40% deposit on their new home.
Several other lenders are offering two-year fixed-rate loans with interest rates of 1.19%.
Five-year fixed-rate loans are only slightly more expensive. HSBC is offering a deal of 1.36% for homeowners borrowing 60% of their property’s value.
10 other lenders are offering interest rates of 1.5% or less.
Why are fixed-rate mortgage deals dropping?
The average cost of two-year and five-year fixed-rate mortgages fell to a record low in May.
This historic dip was the result of two emergency interest rate cuts by the Bank of England in response to coronavirus.
These cuts reduced the base rate to a record low of 0.1% in a bid to help the economy weather fallout from the pandemic.
Although fixed-rate mortgages are not based on this rate, the fall in the official cost of borrowing had a knock-on impact on swap rates (when two different parties swap interest rates), upon which fixed rates are based.
Another reason behind the drop in fixed-rate mortgage deals is competition.
The mortgage market remains highly competitive right now in a bid to combat the impact of coronavirus on the market.
Lenders have passed on this reduction in their own costs to new mortgage customers in order to keep activity moving.
Who is eligible to use the new mortgage rate deals?
While the most eye-catching rates are only available to people with at least 40% of their home’s value to put down, there are still good deals available for people with smaller deposits.
Several lenders have rates of 1.25% or below on two-year fixed rate deals for those borrowing 75% of their home’s value.
Rates of 1.79% are also available for those borrowing 90%.
Homeowners with a 25% deposit who want the security of fixing their mortgage rate for five years can get interest rates starting at 1.46%.
Those with a 10% deposit can get interest rates of 2.16%.
Important background information
Although it’s good news for borrowers that low-interest rates are available right now, it’s important to factor in the total cost of a mortgage when taking one out.
For example, although HSBC offers the lowest rate on a two-year fixed-rate mortgage of 1.14%, the deal comes with a £999 application fee.
Generally, those with larger mortgages are better off paying a high application fee to secure a lower interest rate.
Those with smaller mortgages are better off going for a less competitive rate but a lower arrangement fee.
Either way, it is important to work out exactly what a mortgage will cost you when searching for the best deal.
Top 3 takeaways
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Best-buy two-year fixed rate mortgage deals have tumbled below 1.15% as borrowing costs continue to fall for lenders
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Rates of 1.14% are available for people with a 40% deposit, while ones of 1.25% are on offer for those with a 25% one
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It is important to factor in the total cost of a mortgage, including all fees, when shopping around for the best deal
First-time buyers and key workers to get 30% discount on new homes in proposed housing scheme
First-time buyers and key workers and will be able to buy new-build homes with a 30% discount under a new scheme being proposed by the Government.
The First Homes scheme will give people in England the chance to buy a home in their local area for nearly a third less than the market price, saving them an average of nearly £100,000.
30% discount for key workers
Key workers, such as nurses, police officers, firefighters, and teachers, as well as armed forces veterans, will be given priority in this scheme.
The initiative will also be open to people in other professions.
Housing Secretary Robert Jenrick said: "I know that many who are seeking to buy their own home in their local areas have been forced out due to rising prices.
"A proportion of new homes will be made available at a 30% market discount rate - turning the dial on the dream of home ownership."
He added that the discount would be passed on when the property was sold in order to help future first-time buyers.
The Government is currently consulting on how the scheme will be delivered and no date for its introduction has yet been given.
Why is this happening?
Despite first-time buyer numbers hitting a 12-year high in 2019, stretched affordability and large deposit requirements are still preventing many people from getting onto the property ladder.
The Government has made improving the UK’s housing situation a key priority, pledging to build more than one million new homes during the current parliament in a bid to improve affordability.
The First Homes scheme is part of its commitment to help more people get onto the property ladder.
Who does it affect?
First Homes will not only reduce the amount buyers pay for their homes, but it will also reduce the size of the deposit they need to save up and make it easier for them to meet mortgage affordability requirements.
With the average new-build home costing £314,000, first-time buyers using the scheme will save an average of £94,000, while those putting down a 20% deposit will need to save £18,000 less.
The scheme aims to help people in areas of high demand, who would be unable to afford to buy a home locally without the discount.
What’s the background?
While the exact details of how the scheme will operate are still unclear, the Government has indicated that it will impose a price cap on the properties available through First Homes to ensure the initiative helps those who would benefit most from it.
The discount will be paid for through contributions that housing developers routinely provide through the planning system, which the Government said was an established mechanism for ensuring that new developments deliver benefits for local communities.
No details have been given on what criteria will be used to determine whether potential buyers are ‘local’ but armed forces personnel will be exempt from this requirement.
The next step
With the government consultation for the design of First Homes still underway, it will be some time before any developments are announced.
Meanwhile, you can prepare to buy your first property by knowing exactly how much you can afford to borrow and what lenders assess.
Stay up-to-date with First Homes developments here.
Top 3 takeaways
- First-time buyers will be able to purchase a new-build home for a 30% discount under a new scheme being proposed by the Government
- The First Homes scheme will enable first-time buyers in England to save an average of nearly £100,000
- Key workers, such as nurses, police officers, firefighters, and teachers, as well as armed forces veterans, will be given priority to take advantage of the initiative
Q&A: what’s happening in the housing market?
We talk to Gráinne Gilmore, head of research at Zoopla, for the latest insight on the housing market during the coronavirus lockdown.
Q. Gráinne, what’s happening in the housing market right now?
A. The answer to this question depends on where you’re based in the UK.
In England, the reopening of the market on 13 March led to a staggering 88% surge in pent-up demand.
Homebuyers and tenants (who could not progress their next move during lockdown), contacted agents to restart moving plans as soon as the market reopened.
We’re seeing similar demand building in Northern Ireland, Scotland and Wales, where the housing markets are still closed.
You should expect a similar surge once agents in these countries can operate fully. This may only be weeks away for the Scottish market, as Nicola Sturgeon has announced that the market in Scotland will reopen in June. The exact date has not yet been revealed.
Q. Where has demand grown the most?
- As shown in our latest monthly UK Cities House Price Index Report, the strongest rise in demand is in the English coastal cities of Portsmouth and Southampton and Liverpool.
There’s also been strong growth in demand in other key cities such as Newcastle, Oxford and Leeds.
Q. Has COVID-19 influenced buyer behaviour?
As we emerge slowly from lockdown, millions of UK households may be reviewing their housing priorities after spending so much time at home. We refer to this as the “post-COVID bounce.”
People might have realised their need for a more spacious home or a home with a garden.
With people working from home more in the future, the opportunity to move to another area (particularly those further away from central cities) has emerged.
The more rural areas which have seen strong rises in demand include Monmouthshire in Wales, Aberdeenshire and Devon.
Q. Do you think the market will return to business as usual?
A. Demand levels in England are slowly returning to business as usual.
But in other parts of the UK, things are not back to pre-pandemic normal.
Unemployment levels, average earnings and consumer sentiment (how optimistic consumers feel about their finances), all affect what happens in the sales market.
These factors are all likely to change as the economy feels the impact of coronavirus.
Access to mortgages for homebuyers will also remain key in keeping the market moving.
Much will depend on the availability of mortgages for those who do not have large deposits in the coming months.
While the government has already extended mortgage payment holidays, it could also take further action to support the economy or the housing market in the future.
Q. What about the rental market?
A. Demand levels in the rental market have surged in recent weeks.
These levels could remain higher than usual. This is because when there’s uncertainty in the sales market, there generally tends to be a corresponding rise in people looking for rented accommodation.
This could be in search of a stop-gap between selling and buying. Or it could be first-time buyers staying in rented accommodation for longer while uncertainties in the sales market play out.
Q. What do you think is going to happen to house prices?
A. House prices are currently up around 2.4%. But the economic landscape indicates that there may be some downward pressure on this level of growth.
It’s still early days, as initial sales are being agreed just after the market opening in England.
Our data will start to give us an indication of whether people selling their homes are willing to accept lower prices.
In some cases, sellers may be in no rush to sell. This means there could be an impact on transaction levels. We currently expect these to be around 50% lower than the total number of transactions seen last year.
Q. What’s the 2020 forecast for the housing market?
A. The extension of the mortgage payment holiday offers further support for homeowners struggling financially during coronavirus.
This could be due to being placed on furlough or facing unemployment.
We expect the slow rate of growth to become more marked over the summer, but we cannot predict anything with the current uncertainties.
A clearer picture will emerge when we see more sales complete.
Thank you, Grainne.