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Building societies winning the mortgage rate battle – Moneyfacts

  • 05/02/2018
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Building societies winning the mortgage rate battle – Moneyfacts
Building societies are offering better deals than banks on rates as competition in the mortgage market remains fierce, according to research from Moneyfacts.


Despite the Bank of England (BoE) Base Rate increase, competition in the mortgage sector has remained high – exerting downward pressure on rates for banks and building societies alike.

However, building societies are gaining the upper hand, said Moneyfacts, by offering lower deals.

On a comparison between building societies and eight of the largest UK banks, rates for the average five-year fixed loan saw a significant difference of 0.41%, with building societies offering an typical 2.59% against the banks’ 3.00%.

However, the difference on two-year fixed loans was much smaller, with building societies 0.06% lower at 2.27%, compared to the banks’ 2.33%.


Better deal

“Building societies are offering borrowers a better deal when it comes to rates,” said Charlotte Nelson, finance expert at Moneyfacts.

She continued: “The difference in price of the average two-year fixed rate between these rivals has shrunk over the years, due to this being a key focus for all lenders. However, even in this extra-competitive area building societies offer borrowers a slightly better deal.”

Nelson added that rates for the average five-year fixed  at 90% loan-to-value (LTV) from a building society is a “whopping” 0.72% lower than those offered by the main banks – with societies offering 2.94% against the banks’ 3.66% at 90% LTV.

“Borrowers have traditionally looked to the short-term to keep their options open if anything changes, and the main banks do all they can to remain competitive in this key area,” said Nelson.

“However, with such a large gap between the two rivals [on the five-year fixes], it appears that building societies are clearly starting to look beyond the short-term and offer borrowers appealing rates for five-years as well.”

The reason building societies are able to best banks on attractive rates, said Nelson, is because societies can take a more flexible approach to lending.

Nelson commented: “Building societies clearly want to be seen as supporting first-time buyers, and offering lower rates is just one of the ways they can do this. This group of lenders also tend have a more flexible underwriting process, allowing them to consider the needs of these borrowers.”


Remortgaging reducing

However, despite the advantage over flexibility and having lower rates, Nelson also noted that the gap has been shrinking for some time – and may widen again as competition diminishes.

“At the moment, we’re still seeing both sets of providers remain competitive, because they need to get people remortgaging,” said Nelson.

“The high street banks may want to retain their remortgaging book to protect themselves against future base rate rises, and if that’s the case – the gap is likely to get smaller,” she continued.

Nelson added: “But, remortgaging is starting to diminish, and the amount of remortgaging will eventually have to go down as people fix their deals. So it’s likely to get bigger again as the competitiveness of the market diminishes.”

Nevertheless, given the competitiveness of the market and the low rates on offer, it may be an opportune time to look away from the main banks, said Nelson.

“Interest rates are expected to rise in the near future and as a result, borrowers are starting to consider their options.

“With such a large gap between the main banks and building societies, perhaps it is time for borrowers to consider looking away from the high street to get the most cost-effective deal, particularly over the longer term.”

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