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The rate war that began before the summer has since continued in what has already been a memorable market, following an extended stamp duty holiday and the launch of the mortgage guarantee scheme.

Find out more about what is driving sub-1% mortgage rates in this recent article from Financial Times:

“Remarkable”, “unbelievably cheap” and “astonishingly low” are some of the words that have been used to describe the recent fractional mortgage rates.

The rate war that began before the summer has since continued in what has already been a memorable market, following an extended stamp duty holiday and the launch of the mortgage guarantee scheme.

Chris Sykes, an associate director and mortgage consultant at Private Finance, says the business has seen many borrowers take up rates below 1 per cent, and even some borrowers switching and paying an early repayment charge to secure a sub-1 per cent rate.

“Speaking to lenders, many would rather lend for next to nothing at the moment with a view of hopefully retaining the client in two, three or five years time, than just sit on cash in the bank, of which they have plenty,” he says.

Santander’s head of mortgage development, Graham Sellar, affirms that savings accumulated during lockdown have contributed to the sub-1 per cent mortgage market.

“A lot of customers haven’t spent as much money over the past 18 months, as they would have done less holidays, less travel, etc. Therefore the bigger banks have got quite a lot of liquidity at the moment. So they’ve got lots of money in current accounts and low-rate savings accounts.

“So what you’ve got is big banks who’ve got money saved, and they want to lend that money. And you’ve got a large amount of demand in the marketplace for mortgages.

“The two things go in parallel, and then obviously the rates get forced down as competition takes place.”

Savings growth

Nationwide’s head of mortgages, Paul Archer, highlights the record-high household savings ratio, which almost tripled from 8.9 per cent in January to March 2020, to 25.9 per cent in April to July 2020, according to data from the ONS.

“Lenders, particularly the ring-fenced banks, have got a lot of money coming in savings which they’re not paying an awful lot for, because those savings rates aren’t great, and [they] are able to lend it pretty cheaply and make a pretty good return on it,” Archer adds.

Another factor behind the sub-1 per cent rates, says Sellar, is the amount of homes being sold in the UK this year, with the mortgage market performing between 40 and 50 per cent above expectations due to the stamp duty holiday extension, the mortgage guarantee scheme and customer demand for upsizing.

Fred Sharp, director of mortgage distribution at The Co-operative Bank, whose intermediary brand Platform is offering a 0.79 per cent fix for two years at 60 per cent LTV, says it looked to ensure that products met demand from home-movers.

“We have seen unprecedented demand for mortgages and we, and other lenders, have had to respond with the right supply of mortgages for consumers. As there’s so much competition for mortgage business, we’ve needed to keep reviewing and repricing options accordingly.”

Sharp also says the brand is focused on growing its market share, and has been regularly reviewing and repricing mortgage products across its range to ensure it offers competitive options for a variety of buyers.

Archer also refers to levels of competition within the mortgage market as a driver behind rates falling below 1 per cent. “[Lenders] want to grow their books. I don’t think there’s many lenders in the market whose stated aim is not to grow at the moment.”

High LTV borrowers

Danny Belton, head of lender relationships at Legal & General Mortgage Club, says rates could fall further than the 0.79 per cent rate offered by Platform.

And while borrowers at higher LTVs typically pay higher rates, Belton says the sub-1 per cent rates could also have a knock-on benefit for high LTV borrowers.

“A lot of lenders, on the flip side, are limited as to the amount of business they can write in certain niche areas. So if you were to take high LTV loans, there’s a limit that they can do,” Belton says.

“If they’re writing more at a low LTV, the chances are we might be able to see more competition at a higher LTV as well. Because that does create a bigger margin for lenders and that will help balance their books. So we could see some really positive outcomes at both ends of the scale here.”

For borrowers at lower LTVs who are thus eligible for a sub-1 per cent rate, Sellar at Santander says there are no “extra hurdles to jump over”.

“You must meet affordability. You’ve got to meet the lender’s credit score and criteria, but there’s no extra policy to jump over to get those rates. They’re available for all customers at those LTVs,” he adds.

Aaron Strutt, product and communications director at Trinity Financial, says that while some borrowers are sceptical whether they really can qualify for a cheap mortgage, many clients are locking into sub-1 per cent rates.

Indeed, Sellar at Santander says it has seen borrowers favour a five-year fixed rate below 1 per cent over a two-year fix.

“We’ve got rates below 1 per cent for two years, and rates below 1 per cent for five years. It’s the five-year rate which is selling more.

“Customers are saying to themselves, I want to fix for longer, because actually that rate below 1 per cent is amazing, and I can get five years of that rate.”

So how long until we see rates potentially rise?

Sellar mentions the Bank of England’s term funding scheme, which is due to end on October 31 and enables banks to access money from the BoE at approximately 0.1 per cent – another reason why some mortgage rates have continued to fall.

“You’re starting to see savings rates slightly rising in the market as well, so you could say in six months time, saving rates are slightly higher, there’s no BoE scheme, and rates therefore may be slightly higher in future months.”

But Sellar adds: “We’d never have predicted rates to fall where they’ve fallen to, so who knows what happens next.”

By Chloe Cheung – Chloe Cheung is a features writer at FTAdviser

Source from : What is driving sub-1% mortgage rates? – FTAdviser.com

Photo Credit: Darren Staples/Bloomberg