Mortgage price war erupts - good news for borrowers

This past week has seen some of the lowest mortgage rates ever to hit the high street emerge. Firstly HSBC launched a 5 year 2.99% fixed rate fee or 3.99% for a 7 year fixed rate (both with a £1,499 fee) which at launch was the lowest ever fixed rate mortgage. Then Santander matched this rate for the same period with a marginally lower fee but yesterday NatWest went one better and launched a 5 year fixed rate at 2.95%, albeit with a punchy arrangement fee of £2,495. These rates are the best that have been ever available to UK mortgage borrowers. However, it isn't all good news as the deals mentioned above all require the borrower to have a 40% deposit and have an excellent credit history so, quite clearly, they aren't going to be for everyone. Perhaps more encouraging is the fact that this past week has also seen several major Lenders such as Barclays/Woolwich, Nationwide, First Direct and Leeds BS have all cut their Standard Variable rates by up to 0.5%. All this is an an encouraging sign and possibly good portent of things to come. These lower rates have come about for two main reasons:

1. Interbank money market rates have fallen dramatically. The 5 year swap rate has fallen from 1.40% in mid June to now just over 1%. This is the tool used by banks to hedge their mortgage portfolios so if they had hedge cheaper, it allows them be more competitive in the mortgage market
2. Today sees the launch of the Government's Funding for Lending scheme. This sees the Bank of England offer cheap loans to the banks for several years in exchange for the banks lending money direct to homeowners and small to medium sized enterprises and not just park it on their balance sheet has happened with the ill-fated Project Merlin. Banks will be getting cash at below money market rates so these savings will be passed into the wider economy.

Of course the next thing that one thinks is "Will this freely available credit cause a rise in house prices?". With the latest house price indices showing falls in just about all areas of the country, one would hope so. There is no doubt that availability of credit is one of the main drivers of house prices but as mentioned above, at the moment these deals are available only to a select few with a 40% deposit - ironically those who probably need it least - so their impact in house prices will probably be quite muted. What will be interesting to see is what happens next and if these lower rates will extend to loans with a higher LTV and to those with adverse credit. As most of the country has picked up some form of adverse credit during the recession, it's this sector that needs a break the most.