Mortgage rates are getting cheaper

At last, mortgages are getting cheaper! Find out which are the best deals around at the moment.

Do you want the good news or the bad news?

Well, the good news is that mortgage rates have been falling in the last six weeks.

Northern Rock was one of the first lenders to start chopping the cost of its mortgages and it was followed by almost all of the major players. Many cut the price of their deals more than once in October and some changed their criteria to allow borrowers with smaller deposits to get a deal.

Things are looking up in the mortgage market and lower rates are good news for homebuyers -- and homeowners.

But the bad news is that recent research has shown that rates are actually still higher than they were six months ago. Lenders had reduced their rates in reaction to the Bank of England cutting the base rate to its historic low of 0.5% in March. The base rate hasn't moved since then, but mortgage rates have gone up.

And according to financial information provider Moneyfacts, they have gone up by quite a bit. It says that when lenders originally reduced rates following the drop in the base rate, they subsequently increased them in the months that followed.

And this means that despite the last few weeks seeing lenders like Abbey, Halifax, Nationwide BS, Northern Rock and Woolwich chop mortgage rates, they are still a long way off the low reached in the spring.

In fact, borrowers with a 40% deposit looking for a £150,000 mortgage now face having to pay £45 a month more than if they had taken out the same deal out six months ago. That's £1,080 more expensive over a two-year fixed rate period for example.

Indeed, when I took out my three-year fixed rate at 3.99% with NatWest back in July I remember being peeved at just missing out on some cheaper rates. Now though, that rate looks very attractive, market-beating even, with NatWest's three-year fix now 4.39% (up to 75% loan-to-value) -- and that's a best buy deal.

What's the difference in rates?

If you have a 40% deposit and want to get a two-year fixed rate mortgage today the average rate is 4.66%, much lower than a year ago when it would have been 5.42%. But it's still 0.53% higher than average rates six months ago which were 4.13%.

In addition to the base rate remaining stable during that time, the cost of funding on the swap rate market is lower than it was six months ago, according to Moneyfacts.

It's a similar picture for those with a 25% and a 10% deposit as the chart below highlights:

Source: Moneyfacts 11/11/09

More cuts required?

So despite lenders having made some steps towards cutting rates in the last month, they clearly need to do more if they are to offset the increases they made in previous months.

But the figures above don't tell the whole story. More lenders are adding in a 30% deposit tier and making their best deals available at this level, not at 40%. This opens up competitive mortgages to many more borrowers and remortgagors who didn't quite have the equity for the best deals, but now do.

The same is happening at the 15% deposit tier, which has seen more activity in the last month too. So while the figures may show one thing, the market is loosening up and lenders are competing at different loan-to-values (LTVs) than they were six months ago, as I explained recently in Large deposits no longer needed.

It's also worth noting that there are many factors that affect mortgage pricing apart from the Bank of England Base Rate, or indeed swap rates - including complex costs and pressures that lenders need to consider. So it doesn't always follow that mortgage rates will reflect interest rates.

Indeed, regardless of whether mortgage rates are higher than earlier this year, the important thing is that the trend is currently downwards. And that's because of increased competition among lenders and marginally increased risk appetite (and I mean marginally). And that's something to be pleased about in my book.

Below are some of the best mortgages on the market at the moment, split into fixed and variable deals:

12 fantastic fixes

*£595 fee for purchase customers only, remortgagors pay £995

13 top variable rates

*£595 fee for purchase customers only, remortgagors pay £995

**first-time buyers only

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

Get help from lovemoney.com

If you need help getting the best mortgage use our resources.

First, adopt this goal: Cut the cost of your mortgage and pay it off early

Next, watch this video: Getting through the mortgage maze

Then, why not have a wander over to Q&A and ask other lovemoney.com members for hints and tips about what worked best for them?

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 4045 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 will revert to the lender's standard variable 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.