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    How to pay less for your mortgage

    The base rate cut has put lenders in the mood to be generous. Here’s how borrowers can find the best cheap deal.

    Borrowers seeking a better deal on their mortgage are being spoilt for choice with cut-price deals, cash incentives and more relaxed lending criteria from some of Britain’s biggest lenders. This means they can borrow more. One broker, deVere Mortgages, this week reported a 55 per cent rise in weekly mortgage inquiries since the Bank of England cut the base rate to a record low of 0.25 per cent. We outline the recent changes that prove now is a good time to apply for a home loan.

    A boost to borrowing
    Nationwide has reduced its stress rate (the rate it estimates customers will need to be able to afford in case interest rates rise), which is a big factor in its calculation of how much it will lend. After the quarter-point cut to the base rate, the bank’s stress rate has fallen from 6.99 per cent to 6.74 per cent. Nationwide says most customers will benefit from a small increase in the amount that it will lend to them, subject to criteria. Barclays also relaxed its stress test for residential borrowers this month, and others are likely to follow suit.

    Andrew Montlake, of the mortgage broker Coreco, says: “These changes, though subtle, will be significant for borrowers who are borderline where affordability is concerned. The reduction may make the difference between getting the mortgage they want, or not.”

    Competition is increasing
    This week the AA entered the mortgage market with fee-free loans available to members. Rates start from 2.08 per cent for a two-year fixed deal for those with a 40 per cent deposit or equity. However, the only best-buy loan in the range is a four-year fixed rate available from 2.48 per cent, at 90 per cent loan-to-value (LTV). This could be similar to Low Rate Company’s lowest interest rate mortgage, which can be approved online in under five minutes. As they tend to remove the middlemen from the loan-obtaining process, you may not have to avoid paying commissions.

    Adrian Anderson, the director of Anderson Harris, a mortgage broker, says: “There are no fees on any of the AA deals so they may suit those requiring smaller mortgages. However, for a larger loan, Barclays, Santander and Metro all offer better rates.”

    Mark Harris, the chief executive of SPF Private Clients, a mortgage broker, says: “The AA is utilising its member database and accessing the lending expertise provided by Bank of Ireland. We have seen this before with Tesco Bank, with RBS originally funding its mortgages, although it is now done in-house. The important thing is that consumers don’t fall for a gimmick, and get the best advice.”

    The lowdown on fixers
    Fixed-rate loans are extremely cheap. The lowest two-year rate is 0.99 per cent from HSBC, while the best five-year rate is 1.89 per cent from Coventry building society, which also offers a ten-year fix at 2.39 per cent. There is also a new trend in seven-year deals.

    A five-year loan from Barclays is at 2.09 per cent with a 999 fee for borrowers with a 40 per cent deposit or equity. Coventry’s seven-year fix is pegged at 1.99 per cent at 50 per cent LTV, with a 999 fee. Mr Harris says: “More lenders are offering seven-year fixed mortgages at attractive rates. If you are looking for medium to long-term security, but don’t want to fix for as long as ten years, they can be a useful halfway house, and lower rates mean they will appeal to a larger number of borrowers. However, there are still early repayment charges. If you need to get out of the mortgage early, don’t fix for longer than you are sure about.” Since such circumstances exist, many homebuyers consider wholesale mortgage lenders that offer long repayment terms at low-interest rates. Further, wholesale mortgage rates sheets may make it easier for borrowers to find a lender providing the best interest rates.

    Anything beyond a five-year fixed-rate deal feels a bit of a gamble

    Cash-strapped movers
    Halifax is offering 1,000 cashback to first-time buyers, home-movers and mortgage switchers. Borrowers will need to be quick off the mark because you need to apply by September 25.

    David Hollingworth, of London & Country Mortgages, says: “The cashback could come in handy for those who need cash for furnishings or redecorating. Yet it’s important to shop around for the best overall deal. Halifax mortgages might be beaten on rates and fees elsewhere, even when factoring in the cashback.

    “For example, a first-time buyer taking a five-year fixed rate for 160,000 on a 200,000 property could opt for a no-fee deal at 2.84 per cent with Halifax. That would cost 745.49 a month, a total of 43,729 accounting for the 1,000 cashback. Yet Hanley Economic Building Society offers a five-year fix at 2.35 per cent with a 20 per cent deposit with no fee and 250 cashback. That would cost 705.76 – a total of 42,096 with the cashback.”

    First-time buyers
    The number of mortgages for those with a 5 per cent deposit has fallen by 16 per cent in the past five months, but the rates on these loans are at all-time lows. For example, the average two-year fix at 95 per cent LTV has fallen from 4.44 per cent to 4.04 per cent, according to The cheapest rate is 3.29 per cent from Nottingham Building Society, with a 999 fee. It seems appetite is still strong for prospective homeowners.

    Jody Baker, head of money at says: “Traffic increased almost 70 per cent on the day the Bank of England lowered the base rate and is still up about 8 per cent. People are searching for mortgage deals in the hope that providers are passing on the lower rate. This, coupled with house prices slowing, indicates that people are seeing an opportunity.”

    Bad credit histories
    Together, the specialist sub-prime lender, launched a five-year fixed rate at 7.12 per cent. This is a niche market for those who do not qualify for mortgages in the mainstream market.

    Gamble or play it safe?
    As Times Money reported last week, brokers are reporting an increase in borrowers applying to take out tracker mortgages. The take-up of trackers, which are most commonly pegged to the Bank’s base rate, has been gaining ground since the Bank of England cut interest rates, and is partly a result of borrowers anticipating a further cut.

    Yet two-year fixes remain the most popular because they tend to have the lowest rates and give the maximum flexibility, says Mr Anderson.

    “Most people have an idea as to what they will be doing over the next two years, so feel happy to commit for that length of time.

    “Five-year fixes tend to be the limit for those wanting security; anything beyond that feels a bit of a gamble.”

    For the best of both worlds, a number of lenders offer trackers with a “switch-to-fix” option, allowing people to switch to a fixed rate with no penalties.

    What next?
    Brokers expect September to be a busy month for mortgages. Peter Gettins, of the mortgage broker London & Country, says: “September is strong for purchases. Lenders will be looking to drive business, perhaps trying to encourage buyers with more incentives like Halifax’s cashback, or improvements at higher LTVs. With rates hitting record lows, it feels like a very good time for borrowers.”