In search of the 0% mortgage rate

Will your mortgage rate ever fall as low as 0%?

Exactly how low can mortgage rates go? With base rates expected to breach their all-time low of 1.5%, something that just a few months ago would have seemed impossible now seems like a real possibility: the 0% mortgage.

We already have scores of 0% savings accounts, but lenders have been less enthusiastic about passing on base rate cuts to borrowers.

Lowest ever rate – for some.

Yet mortgage rates falling. HSBC recently fanfared its lowest mortgage rate since it started lending in 1979, a two-year discounted rate charging just 2.99%.

This is 0.95% below the bank’s standard variable rate (3.94% from 6 February). If HSBC passes on future base rate cuts, it could sink lower still.

Naturally, there is a catch, and a biggie. The deal is limited to 60% LTV borrowers who sign up to the HSBC Premier banking service. To qualify for that, you need either £50,000 in savings or investments with HSBC, or a minimum mortgage of £250,000 and salary of £75,000. Oh, and there’s a £999 arrangement fee.

So this isn’t a serious attempt to pump fresh life into the mainstream mortgage market.

I’m more impressed with First Direct’s tracker, which charges 1.89% above base for life, so you currently pay 3.39%. It has a £799 arrangement fee.

You don’t need to be rich or posh to secure this deal, but your LTV must be a maximum 80%.

Down, down, down.

Mortgage rates are coming down, but slower than borrowers might like. The average two-year tracker now charges 4.1%, according to Moneyfacts, down from 6.29% in October last year, a difference of 2.19%.

But in the same period, bases rate fell from 5% to 1.5%, a gap of 3.5%. So the margin between base and tracker rates has doubled from 1.29% to 2.6%.

Fixed rates have been slower to fall, with the average two-year deal dipping from 6.28% in October to 5.18% today, a meagre 1.1% difference.

Best ever rates!

But fixed rate deals are now beginning to slide further, with two-year swap rates falling dramatically from 5.26% to 2.15% since October.

This week, RBS and NatWest announced their very own “best ever mortgage rate”, a two-year fix for new purchases at just 3.49% (3.79% for remortgages), plus a £799 arrangement fee.

Predictably, this is only available up to 75% LTV. If you want to borrow 85%, the rate suddenly flips to 5.49% for purchases and remortgages.

And of course, this is still a long way from 0%.

Summer of love.

Some lucky souls could soon be sunning themselves with a 0% mortgage, provided they took out their mortgage in the carefree days of summer 2007.

C&G and Woolwich offered trackers at just 0.17% over base, with no collar. Borrowers who snared these deals now pay 1.67%, with more joy to come.

If base rates hit 0%, they can look forward to paying a teensy-weensy 0.17%, if only for a month for two. That is £170 interest a year on a £100,000 mortgage. Or £14.17 a month.

Some could do even better.

In that giddy, pre-crunch summer, C&G offered a two-year tracker at 1.01% BELOW base, which leaves borrowers paying 0.49% and looking dead certs to hit 0%, possibly next month.

Theoretically, C&G could wind up paying these borrowers for the sheer joy of lending to them, although it will almost certainly stick at 0%. Still, I wouldn’t complain about that.

Alliance & Leicester also offered a brace of two-year trackers charging 0.31% and 0.27% below base, and both could soon hit zero.

Collared and tied.

Others won’t be so lucky, because lenders have been desperately invoking their “collars” to choke tracker borrowers’ hopes of scraping zero.

Nationwide won't pass on any more base rate cuts below 2.75% (although it did in December), a pity for those who took its two-year tracker at 0.37% under base in July 2007.

Skipton, Yorkshire and Norwich & Peterborough building societies set their collar even higher at 3%. I bet their customers didn’t pay much heed to this small print at the time, but they’re paying the price now.

Happily, Barclays, Lloyds TSB, Northern Rock, Woolwich, RBS and NatWest have no collar on their trackers, while Abbey sets its floor at just 0.0001%.

HSBC reserves the right not to pass on rate cuts to customers, but says it has no plans to enforce this.

Borrowers at all these banks could soon be paying rock bottom interest rates.

But I’m remortgaging now.

So if you’re looking for a new mortgage, which deal could you move you closest to the holy grail of 0%?

Right now, the best you can get is that First Direct rate at 1.89% over base. If rates do fall to zero, you will pay £1,890 interest a year on a £100,000 mortgage, or £157.50 a month.

Naturally, you will have capital repayments on top. My advice would be to keep your monthly repayment the same, and use your interest savings to pay down your debt.

You’ll reap your rewards when inflation takes off again, and the days of near-0% interest rates start to look like a dream.

One more thing.

The frustrating thing about all these low-interest deals is that they are restricted to borrowers with a large amount of equity in their property.

What the mortgage market urgently needs is for lenders to start offering “lowest ever” remortgage rates to people above 85% or 90%. Even though the Government has moved to make mortgage lending easier, we may have to wait to a fair bit longer for that.

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