Friday, 8 February 2013

Mortgage rates dive

The cost of mortgages for many borrowers has hit a new low, the result of a government move to make cheap money available to banks and building societies.

First Direct has launched a five year fixed rate at 2.69% and Chelsea Building Society is offering a fixed rate for two years at 1.89%, the latest in a succession of lenders trying to outdo each other with the cheapest offers.

Both require substantial up front fees and are only available to borrowers who can put up a substantial deposit: First Direct is charging nearly £2,000 and requires the borrower to lay down 35% of the price.

The government's Funding for Lending Scheme is channelling billions of pounds to lenders at very low interest rates. Critics have pointed out that the initiative has largely bypassed first time buyers with small deposits.

Instead, most of the cheap offers are taken up by homeowners re-mortgaging or moving house.

And the Scheme has resulted in a sharp downward lurch in interest rates for savers. The financial information firm, Moneyfacts, said this week that the average interest rate for a new tax-free Individual Savings Account, or ISA, had fallen to 1.74% from 2.55% a year ago.

Bolstered by Funding for Lending, banks don't need to compete for savings to raise funds.

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