The average cost of a two-year and five-year fixed rate deal is now the lowest on record, making it a great time to remortgage. Here’s why.
The average rate charged on a two-year deal is now just 2.09%, while interest rates on a five-year fixed average 2.35%.
This is significantly below the record low of 2.66% that was set only last month.
Why are mortgage interest rates dropping?
The Bank of England has made two emergency cuts to the base rate (the bank’s set interest rate for lending to other banks) in response to the coronavirus pandemic.
These have reduced the base rate to a record low of 0.1%.
This fall in the official cost of borrowing has impacted swap rates (when two different parties swap interest rates), upon which fixed-rate mortgage deals are based.
Lenders have passed on the reduction in their own costs to borrowers.
Despite being able to make mortgage deals cheaper, banks and building societies have had to review the level of risk they take in lending.
This is due to the impact the virus is having on the UK’s economy.
As a result, many lenders have reduced the number of products they offer those borrowing a high proportion of their property’s value. In other words, those who need a mortgage with a high loan-to-value (LTV).
Is it a good time to remortgage?
The record-breaking fall in average fixed-rate deals makes it a great time to remortgage. Especially if your current mortgage deal is coming to an end.
This is the same for those sitting on their lender’s standard variable rate (SVR).
The typical interest rate charged on an SVR is around 4.5%.
This means that homeowners could save more than £3,135 a year if they switch to an average two-year fixed rate deal of 2.09%, based on a £200,000 mortgage.
The gap between the cost of a two-year and a five-year fixed-rate deal has also narrowed.
So homeowners now pay a lower premium for the security of knowing what their mortgage repayments will be for five years.
Mortgage choice for homeowners has taken a dip
The number of different mortgages homebuyers can choose from has more than halved. It’s dropped from 5,222 products on 20 March to just 2,566.
The situation is particularly tight for people looking to borrow a high proportion of their property’s value.
The number of two-year and five-year fixed rate mortgages for homeowners with only a 5% deposit has dropped from 279 to just 22. Choice for those with a 10% deposit has declined from 563 to 50.
What are the options for people with small deposits?
A total of 72 mortgage products are still available for people with only 5% or 10% to put down.
Although lenders have increased rates on loans for people borrowing 95% of their home’s value,(raising the cost of five-year fixed rate deals by 0.04% and two-year ones by 0.1%) the rise is very small.
This suggests they are still open for business for this sector of the market.
Lenders have cut rates for people borrowing 90% of their property’s value. This indicates competition is still strong in this area, albeit on a reduced product range.
If you only have a small deposit and are struggling to find a mortgage, consider using a mortgage broker.
They’ll be able to scour the whole market on your behalf and help you find the best deal.
This is not just in relation to rates and fees, but also taking into account the likelihood of your application being accepted.
A mortgage broker will also be able assist you with the application process.
Top 3 takeaways
The average rates for two-year and five-year fixed-rate mortgages have dropped to the lowest level since records began in 2007
The typical rate charged on a two-year deal is now just 2.09%, while interest rates on a five-year deal average 2.35%
But the number of different mortgages available has dropped from 5,222 products on 20 March to just 2,566