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How low can mortgage rates go?

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The launch of the Funding for Lending scheme may not have had a huge impact on net lending but it is had a big impact on lower LTV mortgage rates.

The latest Bank of England figures show mortgages and business net lending fell by £300m in Q1 2013, compared with the same period last year.

Meanwhile, mortgage rates have plunged to new depths, culminating in a 1.69 per cent two-year fixed rate by Chelsea Building Society last week.

The deal is available at 60 per cent loan to value and launched just four days after Tesco unveiled a two-year fix at 1.74 per cent and 60 per cent LTV.

We are in the middle of a full-blown rate war at 60 per cent LTV, where lenders are desperately seeking the headline-grabbing lowest- ever mortgage rate.

Yorkshire BS and Natwest have similar deals at 1.74 per cent and all lenders have arrangement fees well above £1,000.

Moneyfacts data shows the lowest two-year fixed rate in June 2012 was HSBC’s 2.64 per cent at 60 per cent LTV. It is almost 1 per cent lower today.

Today’s rates bring big opportunities for brokers as low mortgage rates drive enquiries and, with high arrangement fees attached to deals, most borrowers could benefit from advice.

Mortgage Advice Bureau head of lending Brian Murphy says while most deals are direct-only, there are some available to brokers such as NatWest’s 1.74 per cent offer.

He says: “The FLS has had a significant impact on rates in general and the cost has fallen by more than 0.75 per cent on two, three and five-year fixed rates since its launch. It is very significant and I don’t know where it will end up.”

Moneyfacts financial expert Rachel Springall says: “Rates on two-year fixed deals are still falling and it is unlikely to stop, especially if a top lender were to reduce its rate further as other lenders are likely to follow suit.

“Most of the deals require a deposit of 40 per cent, which may suit those looking to move house or remortgage if they have the equity. Due to FLS, banks and building societies are under instruction to increase lending, so offering the lowest rates can attract more business.

“Headline mortgage rates are the easiest way for borrowers to compare deals but they must weigh up the overall cost, including fees.”

As lenders do battle, brokers are asking whether rates can drop below 1.5 per cent, even with a hefty arrangement fee attached.

Trinity Financial director Aaron Strutt says: “Rates will continue to fall. It is only a matter of time before we see a two-year fixed rate at 1.5 per cent, probably with a £3,000 fee. There are three or four lenders that just continue to undercut each other.”

Strutt says there are signs lenders are moving to increase LTVs on two-year fixes instead of simply knocking off a few basis points every week.

London & Country mortgage specialist David Hollingworth says: “There has been a tit-for-tat repricing, with Chelsea dropping its rate by 0.5 per cent just after Tesco’s 1.74 per cent deal. I think 1.5 per cent deals are a way off yet but it cannot be ruled out because prices are still coming down even if swap rates go up a little bit. It is very competitive, which is great for brokers.”

Your Mortgage Decisions director Dominik Lipnicki says clients need to consider whether longer-term deals could be better.

He says: “Clients need to think where rates will be in two years. They might be better looking at a longer deal now, even if it is more expensive to begin with.

“Too many people took out a great fixed-rate deal in 2008, just before rates collapsed. It looked like a good deal then but in hindsight it was not.”

Low rates could cause problems further down the line, with borrowers facing rate shocks as rates rise. For example, Chelsea’s cheapest two-year fix reverts to 5.79 per cent after two years, an increase of more than 4 per cent.

Lentune Mortgage Consultancy director Stuart Gregory says: “We could get into crazy territory. When demand increases, lenders will adjust their margins upwards and there will be fewer price fights and rates will increase.”

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