Lenders cut both rates and penalties as mortgage war intensifies

The battle for mortgage customers has entered a new phase as Coventry Building Society launches a rare five-year fix loan with no penalty for early repayment.

Its five-year Fixed Flexx mortgage, for those with deposits of at least 50pc, costs £499 to set up and has a 1.99pc interest rate.

The lowest five-year deal currently on the market is offered by HSBC, at 1.59pc, according to Moneyfacts, the financial data firm. But as is typical with fixed-rate loans, there are hefty "early redemption charges".

Penalties are normally applied if the borrowers pays off more than 10pc of the outstanding mortgage amount each year. Some charge a flat penalty, others steadily reduce the charge towards the end of the term.

Penalty-free fixed-rate mortgages are rare but not unheard of, said David Hollingworth, of London & Country, the national mortgage broker.

"For those who aren't sure or want to keep their option open this is helpful. You don't have to compromise on fixing as long as you're prepared to pay a slightly higher rate on the mortgage," he said.

Hinckley & Rugby offers a range of mortgages that also come without exit repayment charges, though only for two-year deals.

It offers a two-year fixed deal at 1.95pc for deposits of at least 10pc  with a £999 fee.

Mr Hollingworth added that savers searching for longer-term loans should investigate 10-year fixed deals, some of which come with a five-year lock in after which there is no early payment charge. Lenders TSB and First Direct both offer deals of this type, with First Direct charging 2.49pc.

Lenders are braced for a surge in new applications as a wave of existing fixed-term deals come to an end this autumn.

Yorkshire Building Society reported a 68pc rise in remortgage applications in the year to August. Around £35bn of British mortgages are due to mature in September and October.

Those who took out five-year loans in 2012 will find rates have dropped dramatically since then. A good five-year deal in 2021 would have charged around 3pc. On a £200,000 repayment loan that would cost £957 per month. A rate of 1.59pc would cut the monthly cost to £813.

Yorkshire's Charles Mungroo said: "It’s encouraging that borrowers have been taking action before their deal comes to an end.

"We’re hopeful this trend continues so they could potentially start to see their monthly repayments reduce significantly thanks to low interest rates and in some areas, an increase in house prices recently that will improve their mortgage loan-to-value."