Mortgage rates fall to record low

Borrowers continue to prosper, but savers struggling

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The average rate on a two-year fixed mortgage has fallen below 3% for the first time on record as a price war between lenders rages on, according to a financial information website.

Moneyfacts.co.uk said that across all of the 1,174 two-year fixed-rate deals currently on market, the average rate is now 2.98%, having tumbled from 3.06% on March 1.

This is the first time on Moneyfacts' records, which go back to 1988, that the average rate on a two-year fix, including mortgages of all deposit sizes, has fallen below 3%.

Rates at the lower deposit end of the market have seen particularly sharp falls in recent weeks, with the typical rate on a 15% deposit two-year fixed mortgage falling from 3.06% at the start of March to 2.89%. The average rate for someone with a 5% deposit looking for this type of deal has fallen from 4.90% to 4.81% in recent weeks.

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Meanwhile, since the start of March, the average two-year fixed rate on offer for someone with a 40% deposit has edged down from 1.93% to 1.92%. For someone with a 30% deposit it has decreased from 2.67% to 2.65%.

Strong competition is being seen across the board as lenders chop away at their rates, which has pushed the average rate overall down, Moneyfacts said.

Moneyfacts put the falling rates down to a general appetite for competition between lenders and falling swap rates, which make it cheaper for banks and building societies to borrow money to lend out in mortgages.

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Swap rates are falling amid expectations that the base rate could stay at a historic low of 0.5% for some time yet, or that it may even be cut as the country experienced a 0% Consumer Prices Index (CPI) rate of inflation last month.

The slide in inflation bolstered expectations that any hike in interest rates, which have been held at 0.5% for six years, is still a long way off.

Some experts have also predicted that the looming general election could cause some disruption to the housing market, and so lenders could be pricing their loans particularly attractively to borrowers with this in mind.

Figures released by the Bank of England yesterday showed that the number of mortgages being approved to home buyers increased to its highest level in six months in February.

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Moneyfacts said the ultra low two-year deals currently on offer include a fixed rate of 1.18% from Yorkshire Building Society for borrowers with a 35% deposit and a deal at 1.24% from the Co-operative Bank for people with a 40% deposit.

Sylvia Waycot, editor at Moneyfacts.co.uk, said: "The drop to zero inflation has resulted in the constant speculation of a Bank of England base rate rise being kicked to the kerb for the time being. Removing that concern has made it easier for lenders to drop some rates in order to be more competitive."

She continued: "A happy consequence of zero inflation is that those on a higher LTV (loan-to-value) become less of a lending risk because the money in their pocket stretches further, making the risk of tipping into mortgage arrears less likely. Lenders normally factor this risk into the overall rate charged, so as the risk has lessened so has the rate."

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