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

  • Best-buy two-year fixed rate mortgage deals have tumbled below 1.15% as borrowing costs continue to fall for lenders

  • 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

  • It is important to factor in the total cost of a mortgage, including all fees, when shopping around for the best deal