Record low in mortgage 'price war'

Key and housesThe battle between mortgage lenders to squeeze rates further below 2% has been stepped up when a building society launched a record low deal.

However, borrowers wanting to take out the Chelsea Building Society's two-year fixed rate at 1.89% will need to come up with a 40% deposit and a £1,695 booking fee.
Financial information website Moneyfacts said that the deal is the lowest two-year rate on its records stemming back six years, and it is unlikely to have been beaten in earlier decades as the Bank of England base rate is currently at an all-time low.

Chelsea is part of Yorkshire Building Society, which also unveiled a new two-year fix at 1.94% at 60% loan-to-value (LTV) which comes with a £1,495 fee.

Rachel Springall, spokeswoman for Moneyfacts said a "frantic price war" has broken out in recent weeks between lenders to get the market-leading rate on short-term deals. However, they also tend to have large fees attached, meaning it could work out cheaper for some borrowers to go for a deal with a higher rate but a smaller fee.

Last week, HSBC shaved 0.01 percentage points off one of its mortgage products to offer a two-year fixed rate at 1.98% with a £1,999 fee for non-HSBC current account customers or £1,499 for those who are customers with a 40% deposit.

Ms Springall said: "By taking out a two-year fixed deal below the 2% mark, the fee is likely to be higher than those verging on 3%. Customers need to be prepared to move their deal when the term ends quickly, as the SVR (standard variable rate) is likely to be substantially higher. Chelsea Building Society has a market-leading rate at 1.89% but the SVR is over three times higher at 5.79%, the deal from Yorkshire Building Society at 1.94% has an SVR of 4.99%."

There have also been some recent signs of improvement for borrowers with smaller deposits and first-time buyers.

Last week, the Post Office launched a market-leading fee-free deal for borrowers with a 10% deposit with a fixed rate of 4.55% for five years. The Co-op is also offering a "best buy" fee-free two-year fix at 3.59% for borrowers with a 15% deposit and the lender has said that it plans to do more to help first-time buyers in particular this year.

Ray Boulger, senior technical manager at mortgage adviser John Charcol, said that 2013 is the best year to be looking for a mortgage since the credit crunch struck, adding that rates on sub-2% deals are about as low as they can go - which should force lenders to focus more on people with smaller deposits in order to keep competition strong.

© 2013 Press Association
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