UK homeowners and buyers can expect a rash of mortgage deals with eye-catching rates but a sting in the tail from higher fees as banks try to find ways to attract more business against a backdrop of 5%-plus interest rates.
With the Bank of England opting on Thursday to keep interest rates unchanged at 5.25% for a second meeting in a row, and with most analysts believing they will stay at or around that level for some time, some mortgage brokers predict more product innovation over the coming months as home loan providers compete to entice borrowers and hit their lending targets.
Mortgage costs had been ratcheting up for months, but since late July UK lenders have been reducing their rates on new deals, in what some commentators have called a price war.
According to the data provider Moneyfacts, the average new five-year fixed mortgage rate was 5.87% on Thursday – down from 6.37% at the start of August – though the cheapest five-year deal at the time of writing was a lot lower than that: 4.64% from Santander.
However, despite these price cuts, large numbers of people who took out deals priced at about 1% or 2% will face hefty payment increases.
There are about 800,000 homeowners with fixed-rate deals ending in the second half of 2023, while a further 1.6 million have mortgages due to expire in 2024 – plus, of course, all the people hoping to buy their first home, some of whom currently cannot meet mortgage affordability tests.
This week, Bank of England data revealed that just 43,300 house purchase mortgages were approved in September – about 30% below the 2019 monthly average – while the figures for remortgages were even worse.
While the pricing on new deals may nudge down a little further – new five-year fixed deals priced below 4.5% may emerge before the end of the year, according to Nicholas Mendes of the broker John Charcol – lenders will have to do a lot more to galvanise the market and get people signing up for their deals.
Mendes said borrowers would “see more innovation from lenders”. One option is to use a higher fee to push down the headline rate of a new mortgage deal, which in turn means more affordable monthly payments.
Last month Skipton building society raised eyebrows in some quarters when it launched some two-year fixed loans starting at 3.35% – below market rate – exclusively for existing mortgage customers who might have found themselves struggling when their current deal ended.
However, that lower rate comes with a 5% product fee, to be paid upfront or added to the mortgage debt. This is different from most deals, where the product fee (if there is one) is a fixed amount – for example, £999 – that would be a lot less than 5% of the loan.
While some brokers welcomed this “out-of-the-box thinking”, others were more cautious . Mendes said there could be more deals of this type, where charging a different type of fee allows the lender to offer a lower interest rate.
This has already begun: last Friday, Virgin Money launched a two-year fix aimed at remortgagors with a 5.09% rate but a 1% product fee.
Mendes said more three-year fixed-rate deals could emerge – most fixes are for two or five years. “Consumers want stability but [many] don’t want to be tied in for five years as rates come down.”
Chris Sykes, a technical director at the broker Private Finance, said the Bank’s decision to keep rates unchanged would “provide that additional level of confidence to lenders that hopefully this is the peak, even if we are going to be at the peak for a while”.
He said there was “not going to be much major movement on mortgage rates until the base rate starts coming down, or inflation is low enough to predict that the base rate will soon come down”.
As a result, Sykes said, there is no real point in borrowers holding out for dramatically better rates, as these will not be along any time soon.
