Mortgage rates hit ‘extraordinary low’ as bank funding costs shrink

High street bank signs

Homeowners can now access mortgage deals with interest rates below 1.5pc, as banks offer bargain deals to entice customers back to the market.

Cheap funding has helped mortgage lenders cut the interest rates charged to consumers. Swap rates – the market's estimation of future borrowing costs – have fallen, the Bank of England has lowered Bank Rate and providers are paying less to savers, meaning they can pass on these reductions to borrowers.

The mortgage market seized up at the start of the coronavirus outbreak as the number of people seeking new loans dwindled. Scores of first-time buyer loans were withdrawn and mortgage applications struggled to complete given surveyors were banned from valuing properties in person.

While first-time buyer mortgages are still limited, some banks have started offering loans to customers with smaller deposits. Clydesdale Bank, Virgin Money and Yorkshire Building Society have now relaunched loans for borrowers with a 10pc deposit. However, few banks are yet to offer deals to those with 5pc cash.

For borrowers with bigger deposits, many lenders have reduced mortgage rates to below 1.5pc.

Mark Harris of SPF Private Clients, a mortgage broker, said: “Longer-term fixes in particular offer extraordinary value. TSB has a five-year fixed-rate for remortgages from 1.34pc while HSBC has a five-year deal pegged at 1.39pc, both requiring a 40pc deposit.”

Mr Harris said rates had fallen for several reasons, including the fact that the five-year swap rate has fallen, dropping below 0.25pc this week. As recently as mid-March, when lockdown measures were first enacted, the rate was above 0.5pc.

Swap rates are a key tool that banks use to determine mortgage pricing. They determine how much it costs to fund loans from the money markets. A fall in the swap rate generally leads to a fall in the interest rates charged to customers.

Banks and building societies also use their own funds to loan cash to customers. Savings rates for the best easy-access accounts have fallen to just above 1pc, prompted by the Bank Rate being cut to a historic low of 0.1pc.

Mr Harris said: “The mortgage market is over-supplied and consequently highly competitive in terms of pricing. With purchase transactions likely to be 500,000 or so fewer this year, expect lenders to compete hard for the business that is out there.”