Short-term fixed mortgage rates continue to fall as price war goes on

Yorkshire Building Society is the latest lender to cut its rates. Who's cheapest now?

The interest rate war among mortgage lenders continues, with Yorkshire Building Society the latest to cut its initial interest rates. It's now offering a two-year fixed rate mortgage at just 1.18%.

This beats HSBC's recently-launched two-year fix at 1.19%.

We’ve taken a look at who’s eligible for the Yorkshire deal – and whether it’s as good as it sounds.

Can you get the rate?

To qualify for the two-year fix at 1.18%, borrowers need a hefty 35% deposit or equity in their property as the home loan is only available from 65% loan-to-value (LTV). Borrowers will also need to factor in Yorkshire’s chunky £1,369 fee.

The mortgage is available to first-time buyers, people moving home and those remortgaging.

Other eye-catching rates in the building society’s range include a two-year fixed rate at 1.29% with a £845 fee, also available at 65% LTV.

How does it compare?

The next cheapest deal in the two-year fixed market is HSBC’s 1.19% deal. However this requires a slightly higher deposit (40%) and comes with a higher fee of £1,499.

However HSBC is also offering a two-year discount mortgage with an initial interest rate of 0.99% and a £1,499 fee. Payments on this mortgage will rise if either the Bank of England Base Rate rises or HSBC decides to hike its standard variable rate (SVR).

For those borrowers wanting the security of knowing exactly what their payments will be over the next two years, Yorkshire’s 1.18% fix is a better option.

The importance of fees

The downside of headline-grabbing low rates is that they tend to come with big arrangement fees.

For example, as well as the fees outlined above, TSB charges £1,995 for its 1.29% two-year fix while Chelsea Building Society charges £1,545 for its 1.24% two-year deal.

In most cases upfront fees can be added to the mortgage, but doing this will mean paying interest on the amount over the term of the loan, so up to 25 years in some cases.

The general rule of thumb is the bigger the mortgage, the more important the rate and the less important the fee, and vice versa.

To compare costs borrowers should calculate what they will pay during the tied-in period. So if you have a two-year fixed rate mortgage and there are no early redemption penalties after two years, you should work out the total monthly payments plus fees over this time period and compare this with other two-year products.

Fee-free deals

Some lenders offer fee-free deals. Norwich and Peterborough building society launched two fee-free low rate mortgages last week.

At 65% LTV borrowers can fix at 1.94% and at 90% LTV 3.39%. Both deals come with zero fees and £200 cashback on completion.

Despite the higher rates these fee-free deals will work out cheaper for some borrowers.

For example, on a mortgage of £150,000, N&P’s 1.94% fix is cheaper than Yorkshire’s 1.18% fix. Over two years borrowers would pay £14,954 with N&P compared to £15,232 with Yorkshire.

However, for a £200,000 mortgage Yorkshire’s two-year fix works out cheaper: borrowers will pay a total of £19,853 over two years compared to £20,005 on N&P’s 1.94% deal.

Is now the time to fix your mortgage?

Research from Halifax suggests there’s never been a better time to switch from a variable rate to a fixed rate mortgage.

It found that since reaching a recent peak of 4.25% in August 2012, fixed rates have fallen in 18 of the 28 months to an average of 3.15% in December 2014.

During this time fixed rates have, on average, been below SVR mortgages by around 100 basis points (fixed rates at 3.40%, SVR at 4.40%).

However, whether staying put on a variable rate or moving to a fix is best for you will depend on the rate you’re currently on and the mortgage products you’re eligible for. What you think interest rates will do over the next couple of years – rise or remain at 0.5% – will also influence your decision.

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