'New wave' of cheap mortgages

A WAVE of cheaper fixed-rate mortgage deals are set to hit the market despite an expected rise in the Bank of England's base rate, according to economists.

Newcastle Building Society was among the first to pounce on a downward blip in an otherwise rising 'swap' market, where lenders buy money to bankroll mortgages. It launched a two-year fixed deal, offering a rate of 4.44%.

Interest rates have risen from 3.5% to 4% since November and are expected to rise to 4.5% by the end of the year. The effect has been to drive fixed-rate deals higher.

The best rates on a five-year deal rose from 4.9% to 5.25% toward the end of last year. But as fears have eased about how fast the Bank of England will raise rates so has the cost of the best mortgages. The cheapest five-year deal has recently fallen back to just under 5%.

News that the rate of inflation slowed from 1.4% to 1.3% last month has spurred hopes of even cheaper deals.

Simon Rubinsohn, chief economist at City broker Gerrard, believes borrowers will soon see a 'new wave of more affordable fixed-rate deals hitting the street'. Although he adds: 'None of this means that the MPC won't raise base rates further over the balance of this year.'

He also fears cheaper mortgage deals will fuel greater demand in a resurgent property market. 'So much for the monetary policy committee's assumption that house price inflation will fall to zero over the next two years,' he said.

David Hollingworth of mortgage broker London & Country believes more lenders will launch five-year deals fixed at under 5%. 'Although interest rates are generally-speaking on the rise, money markets are volatile and moving around all the time,' he says. 'If lenders are able to catch the market at the right time, they can pass the savings on to borrowers.'

He says the lowest two-year fixed rate is with Chelsea Building Society at 4.42%, followed by Newcastle Building Society at 4.44% and Portman Building Society at 4.49%.

Hollingworth says the lowest five-year rate is offered by Lambeth Building Society at 4.95%, while Alliance & Leicester, Portman and Mercantile offer 4.99%. Some of these deals – such as Mercantile‘s - are only offered to borrowers with a 25% deposit. Arrangement fees also vary: Mercantile charges £245 but Portman charges £399, although it does accept deposits of as little as 5%.