Homeowners are set to benefit from plummeting mortgage rates as banks and building societies embark on a new lending war.
Royal Bank of Scotland has already cut its five-year fixed rate to 4.79% for those with a 10% deposit, while HSBC recently unveiled the lowest-ever five-year fix offered to UK households, at 2.99%. Santander matched HSBC with a mortgage for existing current account customers.
"If other lenders follow suit, it should have a positive impact on the housing market, with cheaper deals," said Mark Harris, chief executive of mortgage broker SPF Private Clients.
Two major factors helping to bring mortgage rates down are low "swap rates" – the price at which banks and building societies lend to each other – and the government's funding for lending scheme.
Barclays, Lloyds, RBS and Nationwide are among those taking part in the initiative to provide cheap loans to banks for several years, at below market rates, in exchange for the banks lending the money to households and small- and medium-sized businesses.
"Although the funding for lending scheme has only recently launched, we expect to see mortgage rates start to fall in coming weeks," Harris said.
"Increased levels of lending would boost the market, so with 100 lenders invited to participate, there should be better rates and more choice of deals. The early signs are encouraging," he said.
Russell Quirk, of online estate agent eMoov.co.uk, warned that not everyone will qualify for the new rates: "The problem is that HSBC and Santander's headline grabbing five-year fixed-rate deals are really only available to a select band of borrowers, with very large deposits. Also, the best rates right now also come with some pretty hefty fees attached."
Borrowers taking out HSBC's five-year fix will need a 40% deposit to qualify for the deal and must pay a steep £1,499 booking fee, while the Santander product (available only to existing customers) has a similar fee of £1,495.
"It was a real landmark moment when HSBC launched that mortgage and others have been catching up," said David Hollingworth of London & Country Mortgages. "We won't see everyone pushing to compete but there will be more changes in rates to come – for the better."
He added that rates will probably fall by around 0.2-0.3% in the next couple of months, shaving around £50 a month off a typical five-year fixed-rate mortgage where repayments are around £1,100 a month.
Quirk said that for those with lower deposits there are "still some very good deals out there, which were worth securing now. For borrowers who are looking to remortgage now or over the next month or two, they do face a slight conundrum. Do they hold off, move onto their lender's SVR for a short period, hoping that mortgage rates, particular on fixed-rate deals will start to fall, and they secure themselves a better rate? Or do they take one of the deals that's on the table now?"
Quirk said it made sense for borrowers with the deposit to get a good rate to fix now. "Fixing on a longer-term period such as five years is probably the most popular option among borrowers. It gives them peace of mind, and although the base rate may not move until 2017, by fixing for five years you take risk out of the equation."
Michael Ossei, personal finance expert at uSwitch.com, warned potential borrowers to look out for the "sting in the tail" of pricey arrangement fees. "Lower-rate mortgages are typically only available to those with a large deposit – usually 40% – and also tend to come with a high arrangement fee attached. This means that these 'cheap' deals could still be out of reach for many, especially first-time buyers."