Lenders have embarked on a price war in recent weeks, with a succession launching fixed rate deals at less than four per cent including the likes of HSBC, Virgin Money and Yorkshire Building Society.
Halifax has become the latest to release a sub-four per cent rate, dropping the figure on its 10-year fix at 60 per cent LTV from 4.35 per cent to 3.99 per cent.
While brokers welcomed the competition, they cautioned that the fact these low rates are focused on lengthy fixed rates limits how appropriate they will be to many clients. There were also suggestions that lenders are focusing their rate drops only on the most profitable deals, with cuts on shorter terms and higher LTVs potentially more impactful.
Look beyond the headline rate
Craig Fish, director at Lodestone Mortgages and Protection, said that while the rate war is “well and truly on”, it’s crucial to ensure that clients look beyond the headline rate and take the bigger picture into account.
This was echoed by Justin Moy, managing director at EHF Mortgages, who noted that “heads will properly turn” when short-term deals, like those on two-year fixed rates, are in a similar price band.
He continued: “The concept of taking a new mortgage deal simply because of rate, not suitability, must be avoided.”
The benefits of a tracker rate
Fish added that he expected further lenders to drop their rates to similar levels, but with larger rate cuts potentially on the cards in the months ahead, it’s important for clients to give serious consideration to tracker mortgages.
“I believe it will be a while yet before the shorter-term fixed rates go sub four per cent, but it should happen in the coming months,” he continued, which meant that a tracker could be a good option.
Moy agreed, pointing out that “tracker mortgages may look better value in the short term, especially if the base rate has peaked and indeed starts to fall later in the year”.
Samuel Ewen, managing director at Rosehill Financial Services, highlighted that recommendations are always made on a case-by-case basis, and added: “We’re arranging many more tracker rates with no exit fees, monitoring the reducing interest rates to potentially switch over to a fixed rate at a later stage.”
More rate cuts to come
The rate war is likely to continue for the foreseeable future, according to Elliot Culley, director of Switch Mortgage Finance, who said that lenders would “attempt to grab as much business as possible from a smaller pool of applicants”.
He added that more lenders would follow suit in a bid to remain competitive.
Austyn Johnson, founder of Mortgages for Actors, agreed, stating that lenders can get more competitive so long as swap rates remain sensible.
“If some lenders are going to sub four per cent, then one by one, other lenders will follow. The only way to stand out when everyone is doing the same is to stand out by slightly undercutting. Competition follows,” he concluded.
I don’t want to fix for that long
A host of brokers noted that while it was welcome lenders were competing in this way on longer term fixed rates, there were plenty of clients for whom it would not be appropriate or desirable to opt for such a lengthy product.
For example, Kylie-Ann Gatecliffe, director at KAG Financial, pointed out that “many clients are still really apprehensive about fixing for a longer period”, and so are looking for rate drops on shorter-term fixed rates.
It’s not just the length of the fixed term which is excluding potential borrowers either. Amit Patel, adviser at Trinity Finance, said that what the market needs now is a lender to be “brave and bold enough to offer those rates to borrowers with a smaller deposit and at a higher loan-to-value”.
Graham Cox, director of SelfEmployedMortgageHub.com, suggested that lenders are “cherry picking” the best customers by being so targeted with their rate cuts.
He explained: “The sub-four per cent deals are for those with large deposits and where the client is locked-in for five years, guaranteeing decent profits for the lender. I’m not sure we’ll see the same generosity on shorter concessionary periods.”
