Why Lenders Are Cutting Their Mortgage Rates

A clutch of high street lenders have cut their mortgage rates over the last couple of weeks. Is the mortgage misery beginning to end?

In the context of the worse year for the mortgage market in well over a decade, July hasn't been bad at all. Not only has a Spanish Bank (Santander) shown some confidence in the UK market by making a bid for Alliance & Leicester (albeit at a bargain price), but the last fortnight has seen a number of the biggest UK lenders cut their mortgage rates.

But let's not get too excited. Mortgage rates are still higher than they were a year ago, plus fees have increased by an average of 20% in 12 months, according to Moneyfacts. What's worse, fees for some fixed rates have risen by 60%, from an average of £590 to £938.

But it's better than nothing.

Which lenders have cut their rates?

Woolwich has cut rates twice this month. The latest move has seen a decrease of up to 0.32% on its fixed rates, with the lender's 10-year fix dropping below 6%, at 5.97%. Three and five-year fixed rates have been cut to 6.29%.

It has also introduced a lifetime tracker at just 5.69%. This comes with a fee of £995, or there is a fee-free version of the deal at 6.89%. However, borrowers need a chunky 40% deposit, or equity, to get this deal.

The UK's largest mortgage lender, Halifax (part of HBOS), has also cut rates twice this month, reducing half of its 45 fixed rate mortgages by up to 0.15%. Its five-year fixed rate is now 6.34%, available to those with a 25% deposit.

Other HBOS brands have followed suit with four of the six Bank of Scotland buy-to-let products dropping by up to 0.25%, and three out of its 11 self-cert trackers reducing by 0.10%. Birmingham Midshires has reduced some of its buy-to-let products by up to 0.20% and Intelligent Finance has reduced 15 of its tracker rates by up to 0.30%.

Abbey and C&G also joined the rate cutting party, and last week Nationwide announced some chunky price cuts on its fixed and tracker rates - up to 0.46% on selected deals. Nationwide also offers a free drop-lock facility on all its tracker rates, meaning a borrower can switch to a fixed deal at any time with no charges.

According to Moneyfacts average fixed rates have begun to drop from a peak almost two weeks ago. Average two-year fixed rates on 11^th July were 7.08% (their highest point in a decade) down to 6.96% on 21^st July. Three-year fixes dropped from 7.30% to 7.18%, and five-year fixed rates from 6.94% to 6.88% over the same period.

Why the cuts?

You may have heard a lot about the Bank of England's base rate in the last few months and its influence, or lack of influence on mortgage pricing.

When it comes to fixed rate pricing, swap rates are the ones to watch. Swap rates represent the cost to lenders of buying fixed rate money -- in other words a tranche of money to be paid back at an agreed rate and time -- like a fixed rate for lenders.

Swap rates actually peaked in mid-June and have been dropping since, but lenders have been slow to pass on the reductions. However, continued drops have now led directly to the reductions seen in fixed-rate mortgage pricing in the last week or so.

Are the good times back for borrowers?

In a word, no.  The best rates are still only available to those borrowers with large deposits, for example 25% of the property's value. High LTV borrowing is still expensive, and this hits first-time buyers the hardest.

Also, swap rates have actually started to increase in the last few days, showing just how unpredictable the market is. If they continue to go up, fixed rates could well be moved upwards again.

And with inflation at 3.8%, it's extremely difficult to predict the next move from the Bank of England. If the base rate was to rise, mortgage rates would increase too. Lenders are still suffering from liquidity problems, so some can afford to keep pricing high to manage volumes of business.

While the market may be enjoying a temporary respite, it is certainly not out of the woods yet.

What should you do?

If you are coming up for renewal or you want to buy your first property, do not wait for rates to fall further. There is an extremely strong chance that they won't, or indeed that they will rise.

The key at the moment is if you see a suitable deal, go for it. Mortgages don't hang around for long in the current environment and although fixed rates are still historically expensive, they are more attractive right now than they have been for a while.

If you are not set on fixing, your options are generally cheaper and offer more freedom to switch, but you should still act quickly as deals change on a daily basis.

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