"NatWest is today launching a 5 year fixed rate mortgage at 2.95%, the lowest ever 5 year fix offered in the UK, although this rate is only available up to a maximum LTV of 60%. The arrangement fee is well above average at £2,495, obviously to subsidise the rate, but even so this still represents fantastic value for mortgages of at least £100,000. Furthermore, remortgages qualify for a free valuation and free legal fees.
"A fee of £2,450 will instinctively put some people off, but to put it in perspective a £2,495 fee on a 5 year fix is equivalent to the same annual amount over the deal period as a £999 fee on a 2 year fix. Furthermore, the rate on nearly all 2 year fixes and trackers (including NatWest's) is higher than 2.95%! The larger a mortgage the better the value a borrower obtains by paying a high flat rate fee in exchange for a lower interest rate!
"NatWest is adopting a similar marketing strategy to the only other lenders with a sub 3% 5 year fix - HSBC and Santander. All are offering a headline grabbing rate up to 60% LTV, coupled with a big fee, but a massive increase in the rate for the next LTV band, albeit with a much smaller free. The rate differentials for the higher LTVs are at least 1%, which is far higher than can possibly be justified by the small increase in the risk or regulatory capital requirements. See tables in Notes to Editors for a comparison of all sub 3% 5 year fixes plus rates up to the next highest LTV band from the same lenders.
"With three major lenders competing so aggressively for the up to 60% LTV market other lenders are likely to see an impact on application levels. For those who don't want to play this game an obvious alternative is to offer slightly higher rates at better LTVs. Nationwide is doing exactly this; it has the market leading 5 year fix up to 70% LTV at 3.39% with a fee of only £499 for purchases (£299 for FTBs) and £999 for remortgages. For some small mortgages up to 60% LTV this deal offers better value than the sub 3% rates because of the lower fee.
"With the launch of these new rates from NatWest, which also recently announced the current market leading 5 year fix at 90% LTV - 4.79% with no arrangement fee - it is already clear that, in stark contrast to Project Merlin, the Funding for Lending Scheme is very quickly proving effective as far as the mortgage market is concerned. Not only does the scheme offer most lenders cheap funding over a 5½ year period and an incentive to increase lending, but it was also a significant factor in the sharp drop in swap and Libor rates since it was announced on 14th June. 5 year swaps and 3m Libor have both fallen by about ¼% since that date, with 5 year swaps closing yesterday at 1.11% and 3m Libor at 0.75%.
Ben Thompson, MD Legal & General Mortgages comments:
“NatWest’s announcement of their record low 2.95% fixed rate mortgage is yet another example of the current ‘price war’ among lenders. Earlier this month, HSBC publicised their latest cuts, swiftly followed by Barclays and Nationwide last week.
These new rates are incredibly competitive by historic standards and are thus attractive to potential borrowers. We can see this shift in lending as a result of general funding costs lowering over the last few weeks, and possibly because of the government’s Funding for Lending Scheme (FLS). We can therefore hope to see more lenders following suit in the coming weeks.
However, as with HSBC’s latest offer, only borrowers with 40pc equity will be able to take advantage of NatWest’s new rate. This highlights the current trend of lenders competing for ‘low risk’ customers, leaving the wider market underserviced. If this competition does persist, it may force lenders up the risk curve in search of margin, eventually benefiting those with lower deposits and equity. However, there is no clear sign of this yet.”
