Mortgage rates could fall to 1.5pc for the first time

The Momentum UK Team 10 June 2013

Extra competition caused by a rush of new lenders entering the mortgage market could see rates falling by as much as 0.2 of a percentage point, enough to cut typical repayments by £600 a year.

Cheap loans from the Bank of England are may be attracting new lenders - said by industry sources to include Home & Savings Bank, NBNK and another household name - and experts say these new competitors will be better placed to pass the low rates on to borrowers than existing lenders.

Because of the way the Bank of England’s Funding for Lending Scheme (FLS) works, lenders can borrow at rates as low as 0.75pc, but the amount they can borrow is tied to the the amount they lend on to households and businesses.

As the Bank of England looks at the “net” rather than the “gross” figure, newer lenders have access to the best rates. This is because established lenders will have a higher number of individuals paying off their their mortgages, thus reducing the "net" figure. New lenders still have a low level of repayments, so their "net" and "gross" lending are similar in early days,  compared to existing competitors, so will be able to fund almost all of their lending through cheap Bank of England loans.

The combination of this cheap Bank of England funding with extra competition from new lenders could lead to a fall in interest rates according to Ian Gordon, banking analyst at Investec, who said “I’d suggest a further 0.1 to 0.2pc decline still feels quite possible.”

Currently, the lowest rate on a two-year fixed-rate mortgage is 1.69pc from Chelsea Building Society, so a fall of 0.2 of a percentage point could take rates to 1.49pc. This could lower repayments by £50 per month or £600 per year on an interest-only basis, or by £30 per month on a repayment loan, assuming you borrowed £300,000, according to the broker Anderson Harris.

Brian Murphy, head of lending at the Mortgage Advice Bureau, said:

“It is clearly a positive when new lenders arrive in the marketplace. Apart from more choice and possible better pricing, we may also see some innovation as new lenders may choose to target specific groups of buyers or focus on a sector of the market that is currently underserved.”