Mortgage wars mean good deals for consumers

Banks and building societies are fighting over market share by slashing their rates – but keep your eyes on the higher fees, warns Sarah Davidson

It isn't quite pistols at dawn but mortgage lenders have definitely started to scrap for business. After four years of banks slamming the door in borrowers' faces, the first signs of a fight for market share are emerging.

With the Bank of England looking less and less likely to raise the base rate this year, lenders across the board have got the scissors out and this week Moneyfacts claimed mortgage rates hit their lowest level in 23 years. The average two-year deal is now 4.32 per cent while the average two-year tracker deal priced at 3.37 per cent.

There are even lower rates on the market. If you can find a 25 per cent deposit Hinckley & Rugby building society is offering a two-year fix of just 2.99 per cent with a £990 fee.

David Hollingworth of mortgage brokers London & Country explains: "A drop in anticipation of base rate climbing imminently has led to money market rates falling, giving lenders the opportunity to sharpen their pencils and cut rates."

Last week alone, Northern Rock has slashed its rates by 0.17 per cent, Leeds Building Society by 0.65 per cent, GE Money by 0.9 per cent, and Yorkshire Building Society has ditched fees on some of its products. Halifax, Cheltenham & Gloucester, Santander and Woolwich from Barclays have also trimmed their rates.

Mr Hollingworth points out that lower headline rates can mask higher fees. "These are genuine cuts although it is always important to factor in the fees as some lenders will offer higher fee options in a bid to trim the rate," he says.

For example, Principality offers a two-year deal at 2.74 per cent with a £1,999 fee to 70 per cent loan to value while Woolwich offers a rate of 2.78 per cent up to 70 per cent LTV with a £999 fee.

Rob Killeen of mortgage brokers Capital Fortune says it was about time lenders passed the rock-bottom base rate on to customers. "Lender margins, the gap between what they pay the money markets and what they charge customers, have been at record levels," he says. "The truth is mortgages have been overpriced for some time."

For years good rates have been available only if you had a big whack of deposit, but recently banks have been dropping their rates at higher loan to values as well.

"Lending criteria and availability are inexorably yet slowly improving," explains Nigel Stockton of national mortgage brokers Countrywide. "This year 90 per cent loan to value deals have become much more commonly available, with Northern Rock, Halifax and Santander all offering good quality rates below 6 per cent for first-time buyers."

Chris Gardner, director at mortgage brokers Obligo, says this has only just begun to happen. Until recently, lenders were aggressively marketing at loan to values of 75 per cent and lower and didn't show much interest in smaller deposit loans," he explains. "However, these aggressive marketing tactics have resulted in a level of inertia at the lower loan to value, the knock-on effect being that lenders are now starting to show more interest at 80 and 90 per cent levels. We're hoping this price competition will spread to lenders relaxing their more stringent lending criteria. The reality is that, despite the great deals out there, some extremely viable mortgage applications are still being declined."

Fahim Antoniades, a mortgage adviser at Mortgage Centre IFA, says borrowers with a smaller deposit should think about looking outside the high street banks. "The higher end of the loan spectrum is dominated by smaller building societies that have appetite to lend up to 90 per cent loan to value," he explains. "Yorkshire Building Society, Furness, Barnsley, Leek United and the Post Office all offer good rates." He says lenders are also easing criteria to compete. "I have seen cases where applicants had been declined by Northern Rock only to be approved for a mortgage immediately after it eased its credit scoring policy on loans over £500,000."

So why the sudden push by lenders to grab more custom? They're worried because borrowers have been sitting tight on standard variable rates which continue to bump along beside base rate. The latest spate of cuts is in the hope of enticing borrowers to remortgage.

"The dilemma of whether to remortgage now or later is a tough one," says Jonathan Cornell of mortgage brokers First Action Finance. "On one hand there are now some excellent rates; on the other it doesn't look like we will see a base rate increase in 2011. If you suspect there is some reason why it will be harder for you to get a mortgage down the line, a job change for instance, it is probably a good idea to remortgage sooner rather than later. There is also the danger if you wait until the rate rises start that the rate you will secure for your remortgage will a lot higher than it is now."

There are alternatives to locking into a fixed rate now. Yorkshire Building Society has just joined ranks with Woolwich, Santander, Nationwide, Royal Bank of Scotland and Skipton which offer borrowers a "switch and fix" or "drop lock" mortgage.

This allows you to hedge your bets by starting out on a lower-priced tracker product, safe in the knowledge that you can switch quickly to a fixed rate at any time if rates start to rise. Both Woolwich and Santander say this type of deal has seen higher pick up in the last few weeks, as do brokers. "Switch and fix deals have certainly become more popular and it's easy to see why they are attractive to borrowers in the current uncertain interest rate environment," says Mr Gardner.

But there are pitfalls. "The problem with the switch and fix deal is that fixed rates will always go up faster than the base rate curve, and by the time the borrower wants to fix, the best rates will have long gone," he says. "When a borrower does decide to fix, the deal on the table won't necessarily be the best on the market, but by then they are tied to that lender and have little choice but to go with the rate on offer. And although the switch and fix deals typically don't have early redemption charges, there is likely to be a product fee, not just when the borrower takes out the loan but also when they move to the lender's fixed product."

Robert Sinclair, director of the mortgage adviser trade body, says the range of pricing structures on these deals makes taking advice a good idea. "There are a variety of pricing options attached to these and consumers should ensure they sit down with a mortgage broker who looks across the market to ensure they are being offered the best deal for them," he says.

The current switch and fix deals offer reasonably competitive rates. Royal Bank of Scotland has a 2.59 per cent variable rate available until 31 August 2013 up to 60 per cent LTV with a £999 fee. Santander offers a 2.19 per cent variable rate for two years on remortgages only up to 60 per cent LTV with a £1,495 fee. You can get a 3.99 per cent variable rate to 1 September 2013 for purchase only from Northern Rock up to 80 per cent LTV with a £995 fee. Woolwich from Barclays has a 2.49 per cent variable rate to 31 August 2013 up to 75 per cent LTV with a £999 fee.