Mortgage rates are at record lows, but that is only half the story for buyers

Home buyers have never had it so good as mortgage rates continue to fall to record lows.

This should translate into more business for estate agents as more clients will have funds to buy their first home or move to the next.

So what is driving mortgage rates down and is it sustainable?

The latest Bank of England data shows the average mortgage rate in April was 2.41%, the lowest ever level.

For a two-year fixed rate at 75% loan-to-value, which is a typical mortgage size for a first-time buyer, the average rate for borrowers has fallen to 1.83%. Two years ago the average at this LTV was 2.54%.

Longer term fixes have also come down. A five-year deal at 75% LTV is now at 2.69% from 3.69% in April 2014.

Even borrowers with smaller deposits are benefiting. Average 95% LTV deals have come down to 3.92% and 4.7% for two and five-years respectively. In April 2014 buyers would have faced an average rate of 5.14% for two years and 5.55% for five years.

Ten-year fixes have also become more popular and now buyers with a 25% deposit could be paying an average of 3.12% for a decade-long fix.

Actual rates are even lower.

Post Office Money has a two-year fix on offer at 1.33% at 75% LTV or you could get a rate of 2.24% from HSBC for five years.

Those with bigger 40% deposits can access the lowest ever rates. For 60% LTV Yorkshire Building Society currently offers a two-year fix at 1.14%.

What is keeping rates down?

Interest rates

Banks and building societies will set their credit based on the Bank of England base rate.

Rates have been stuck at historic lows of 0.5% since March 2009. This means the costs for borrowing money should be cheap.

Swap rates

Mortgages are also priced based on the cost of funding on wholesale markets, known as swap rates.

The more it costs a lender to access money, the more it will charge borrowers. But money is cheap at the moment.

Current two-year swap rates are at0.85% while five-year swap rates are at 1.1%. This is actually relatively high compared with previous months, but is down from earlier this year when they were above 1% and 1.5% respectively,

Lending targets

Banks often set themselves targets of how much they will lend borrowers to grow their market share.

With an EU referendum looming, many could be trying to get business in case confidence changes and buyers begin to turn away from the property market amid uncertainty.

A spokesman for comparison website Monefacts told EYE: “Mortgage rates are at their lowest levels because providers are pricing down their deals as they have an appetite to lend to perspective borrowers and retain existing customers. Lenders are able to borrow from the Funding for Lending Scheme until January 2018, and have been doing so since its inception in July 2012. Because of this reason, lenders are engaged in a mortgage rate war to grab new borrowers and attempt to retain the customers already on their mortgage book.

“The easiest way to get noticed in the current market is to offer an attractive rate of interest, but these typically come with high product fees and with little incentives. This is why it’s so important for borrowers to counter in the reverting interest rate after any initial period, it’s all about true cost.”

Are rates the biggest issue?

Bankers don’t exactly have the best of reputations. So when a lender releases a record low fix the temptation may be to steer clear and wondering if there is an ulterior motive.

Could they be looking to lock borrowers in when cheaper rates may come in down the line? All these are considerations buyers need to make before deciding on a mortgage and securing a property.

But while rates may be low, affordability continues to be an issue as banks impose tough lending requirements and house prices increase meaning a bigger deposit is needed. The supply of homes is also an issue.

The Moneyfacts spokeswoman added: “Until there are a sufficient number of homes built in any given area, certain properties can fetch a high price and London is the best example where properties can be far out of most people’s price range.”

“Regardless of in or out of the EU, there will be buyers priced out of certain homes and sellers who are not prepared to drop asking prices. The term ‘generation rent’ is likely to be with us for sometime yet.”

Data from conveyancers My Home Move shows while the average deposit size nationally last year fell from 26.29 per cent to 25.77 per cent, in London this has actually gone up from 25.55 per cent to 26.35 per cent.

The research looked at 60,000 transactions that MHM worked on and compares them against Land Registry data.

The average property price in 2015 was £182,293 while the average deposit was 25.77 percent, or £46,986.

In comparison, in the capital the average property price in 2015 was £482,512 and with an average 26.35 per cent deposit, buyers were paying £127,141.

It’s also not necessarily all sorts of buyers that are benefiting. More homemovers than first-time buyers managed to secure mortgages through brokers during the first quarter of 2016.

The Intermediary Mortgage Lenders Association’s latest mortgage market tracker shows 80% of homemover applications resulted in an offer and 80% of offers led to a completed deal.

In comparison just 70% of first-time buyer applications and offers went through to completion.

Peter Williams, executive director of IMLA, said the lower first-time buyer figures could be influenced by affordability constraints, some aspiring borrowers making initial enquiries without looking to progress immediately, and others shopping around.

This could all change once data that includes the rush to beat the Stamp Duty deadline in April is included.

Both 2014 and 2015 saw first-time buyer activity make a slower start to the year than homemover and remortgage activity, before registering the fastest growth.

Williams said: “The first time buyer market typically picks up pace in quarter two, although April’s stamp duty reforms have clearly disrupted normal patterns and will have a lingering effect on the supply of property.

“Credit conditions are just one of many factors impacting first time buyers’ journey from enquiry to completion, and the EU referendum adds another unknown into the mix for quarter two which won’t go unnoticed in terms of intermediary confidence and consumer behaviour.”