Fixed-rate mortgages fall to new lows

Mortgage lenders have been slashing the cost of fixed-rate mortgages this week, with one provider launching the lowest ever five-year fix in history at under 3.5 per cent.

On Friday, Yorkshire Building Society cut its five-year deal to 3.49 per cent. The deal is available to borrowers with a deposit of 25 per cent or more and comes with a £995 fee.

Yorkshire’s latest reduction follows a flurry of activity by lenders this week. More providers, including Clydesdale Bank and Woolwich, have launched five-year fixes at below 4 per cent. There are now more than half a dozen lenders offering five-year deals at this level.

“Five-year fixes keep falling to new lows, giving borrowers looking for security over the medium term the pick of some fantastic rates,” said Melanie Bien of Private Finance.

“Those who have enough equity in their home and can qualify for a five-year fixed-rate at well under 4 per cent may be wise to take it, as it is unlikely to get much better than this.”

Banks and building societies have also been cutting the cost of two-year fixes. On Tuesday, Woolwich reduced its two-year fix by 0.24 percentage points to 2.54 per cent - making the two-year fix the current best buy in the market.

Woolwich is also offering a cheaper two-year fix at 2.49 per cent as part of its loyalty mortgage range, which is available to customers who already have a current account with the bank.

However, mortgage brokers believe five-year fixes will provide better value than a two-year deal over the long-term as borrowers risk having to remortgage at a time when rates will be much higher.

According to Ray Boulger of John Charcol, Accord’s five-year hybrid tracker/fix product, whose rate was reduced this week, could work out cheaper than Yorkshire’s five-year fix at 3.49 per cent, particularly for those in need of bigger mortgages.

The deal comprises a two-year tracker at 2.19 per cent - Bank of England base rate plus 1.69 percentage points - followed by a three-year fix at 3.64 per cent.

“Bank rate would have to average at least 1.5 per cent over the next two years for the Yorkshire deal to work out cheaper, which I cannot see happening,” said Boulger.

Mortgage brokers said lenders have been reducing the cost of fixed rates due to the fall in swap rates - the rate at which banks lend to each other - in recent months, following market expectations that interest rates will now not start to rise until late 2012.