Mortgages: reasons to be cheerful

The future's bright for borrowers as low mortgage rates look to be here to stay.

The eurozone might be going down the pan and the British economy is still desperately seeking growth but, believe it or not, there is room for optimism for mortgage borrowers.

Indeed, the last few weeks have offered up a surprising rash of good news mortgage stories. Add these together, put on your rose tinted spectacles, and you might just see a market that is ripe to offer borrowers cheap mortgages for the foreseeable future.

Everything’s rosy

The biggest news came during Chancellor George Osborne‘s Mansion House, when he announced that the Treasury and the Bank of England are going to make significant funding available to lenders – so long as they use it to lend directly to mortgage borrowers and small businesses, rather than shoring up their coffers.

Around £80 billion could be made available to lenders under the scheme, which is a significant sum, particularly when you consider that the mortgage industry only lent £140 billion last year and will probably lend even less in 2012.

By acting as a lender of last resort in this way the Bank of England is trying to avoid another credit crunch and stave off the worst effects of the eurozone debt crisis on the UK.

Osborne has also suggested that plans to increase the amount of capital that banks need to hold against their lending may be scaled back. This is a pretty technical point and refers to the requirements for banks to hold certain amounts of capital for every mortgage they lend, which were set to get even more punitive next year. If the new rules are held back it would give the banks the freedom, and money, to lend a bit more.

Industry experts have gone as far as calling this lending boost a ‘game changer’, saying it could lead to more lending and cheaper mortgage rates – or at the very least a reversal of the recent rate hikes.

In fact, mortgage rate cuts have already started with a number of lenders chopping their deals in the week or so since the speech, and more cuts are expected.

Rates down

Swap rates and the London Interbank Offered Rate (LIBOR) fell strongly in reaction to the speeches and despite ticking up slightly since, they remain very low. We explained the role these rates play in mortgage pricing in How are mortgage rates decided?

As a result there has been a drop in fixed rate mortgage deals, with cuts from Nottingham Building Society (which launched a stonking five-year fix at 3.69%), Leeds Building Society (which launched a stellar ten-year fix at 4.58%) and Skipton Building Society, as well as from Virgin Money and Accord Mortgages (the broker arm of Yorkshire Building Society).

It’s good news for borrowers and hopefully more cuts will follow. Whether rates actually fall back to the levels they were at before the creep in rates started this year is unclear, but any movement downwards is welcome.

Of course, with experts now predicting that the first base rate hike could be as late as 2016 - and the Bank of England actually hinting that base rate may be cut even further - there is also a commercial incentive for lenders to cut their fixed rates, as borrowers increasingly realise that variable rates carry a much smaller risk than they did six months ago.

And they are still significantly cheaper than fixes.

Lending up

Another boost came with the news that mortgage lending rose by a massive 24% between April and May according to the Council of Mortgage Lenders, with gross mortgage lending totalling £12.2bn during the month.

This was also a significant 13% rise on the previous May.

National broker Mortgage Advice Bureau also found that mortgage activity increased in May – it said that applications were 25% up on January, and put the surge down to a boost in remortgaging as borrowers faced with rate hikes earlier in the year looked to switch to a better mortgage deal.

If you are in the market for a new homeloan, below are some of the best around:

Big deposit – 25% or more

Small deposit

*only available to graduates making a joint mortgage application

Use lovemoney.com's innovative new mortgage tool now to find the best mortgage for you online

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.