Get a fixed rate mortgage below 3% - quick!

Lenders are falling over themselves to launch great new fixed-rate mortgages. You'd be daft to miss out!

I understand the appeal of a variable mortgage, particularly at the moment with initial rates so low that they almost seem fanciful. And it all seems relatively secure in terms of bank base rate, with soothing noises from Mervyn King et al about just how long base rate is likely to remain at such a historical low.

However, they have been wrong before. And with bank base rate only headed in one direction, the knowledge that the mortgage payments are only going to increase has alarm bells ringing in the back of my mind.

That’s why, like a broken record, I keep arguing the case for fixed rate deals. And it’s an easy case to make with the lenders currently really competing for your business by launching incredible rates.

The sub-3% club

Just last week Lloyds launched a pretty enticing looking new two-year fixed rate deal at 2.94% for borrowers with a deposit of 30%.

Of course, this two-year mortgage will not suit everyone – you have to be a Lloyds current account holder (any account will do, so be sure to check out the brilliant Lloyds TSB Classic Plus which can pay up to 4% on your money), as well as fork out a mighty £1,895 product fee for the mortgage.

However, more importantly it’s just the latest in a series of two-year fixed rate deals available at less than 3%.

A number of different lenders have launched ultra-competitive deals in the two-year fix market recently – traditionally the favourite mortgage of British borrowers. So long as you have a deposit of at least 25%, you can fix your rate at less than 3% for the next 24 months, and you’ll have a wide range of deals to choose from.

When length matters

Of course, there is a good argument for ignoring the charms of a low-priced two-year fix and instead plumping for a longer term deal. Ask any mortgage broker and they will confirm that the rates on offer on fixed-rate deals of all lengths at the moment are historically very low indeed. As such, it makes sense to fix for a longer period, in order to take advantage of that low rate for longer.

It’s certainly an argument that I buy into. However, it does somewhat rely on base rate rising, and those rises being reflected in future fixed rates.

For example, I could fix with Yorkshire at 2.89% for two years currently with a 25% deposit. If in two years’ time base rate is still at 0.5%, there is a decent chance that when I come to remortgage I will have the option of moving to a similar rate for another couple of years. That would work out a fair bit cheaper than going for the 'safe' option of, say, a five-year fixed rate mortgage from Yorkshire at 3.99%, even accounting for the additional costs incurred in terms of product fees.

You’ll have to work out for yourself whether you would prefer to pay more now to fix for five years  and then forget about your mortgage, or take a cheaper, riskier rate on a shorter deal and then shop around in a couple of years.

Are these rates really any good?

While there are now some brilliantly attractive deals on the market, the fact remains that things could actually be even better. The financial website Moneyfacts has done some number-crunching on the margins the banks are making from fixed-rate mortgages, and it makes for some interesting reading.

Moneyfacts looked at the difference between the rate at which lenders borrow money themselves, and the rate at which they then lend it out to us, and how that difference has changed over the past couple of years. Two years ago the difference stood at 1.28% on two-year fixed rate deals. It’s now 3.29%.

On each £150,000 mortgage, t?hat works out at an extra £1,700 a year of our cash that the banks are pocketing compared to a couple of years ago.

Of course, it’s not just two-year deals where banks are making a killing. On three-year fixes the margin has increased from 0.41% to 3.57%, while on five-year deals it has rocketed from 0.16% to 3.35% today.

It’s worth remembering that these figures are based on the average rates charged, so don’t really apply to the market-leading deals. However, they do show that we should really have a wider choice of great deals to choose from.

It should come as no surprise that the brilliant mortgages I’ve rounded up in my table below don’t come from the banks that relied on State bailouts, who are now the worst exponents of these massive margin tactics, but instead come from some of the less well-known lenders who aren’t quite so preoccupied with boosting their balance sheets.

If you like the look of any of these rates but are not sure whether you'd fit the lender's criteria, bear in mind that you can talk to any of the lovemoney.com brokers for free about any of these deals if you wish. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.

20 fantastic fixed rate mortgages

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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.