The cost of mortgages is coming down as lenders cut the rates on fixed deals. The average two-year fixed rate is now 2.58%, compared with 2.84% last year, according to Moneyfacts, the financial data firm.

In the past few weeks lenders such as Nationwide, Post Office Money and Yorkshire building society have chopped the rates on their range of fixed loans. David Hollingworth of L&C Mortgages, a broker, says: “Competition in the mortgage market has intensified as more lenders demonstrate their desire to attract borrowers with improved mortgage rates. With base rate still at the all-time low of 0.50% and the fear of a rate rise still on the horizon, mortgage rates are at rock bottom.”

Yorkshire’s two-year fix at 1.14% is now the lowest on the market, although borrowers need a minimum deposit of 35% and the fee is £1345. There is also a fee-free version of the mortgage at 1.89%, which comes with a choice of free standard valuation and legal fees or cashback incentives. Brendan Gilligan, mortgage product manager at Yorkshire building society, says: “At the moment borrowers are spoilt for choice with cheap home loans. Our 1.14% provides good value, and will give homeowners spare cash each month to spend on other priorities.”

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Borrowers who want to fix for longer can opt for a five-year deal from HSBC at 1.99% with a minimum 35% deposit and a £1499 fee. Or, Tesco Bank offers a rate of 2.24% with a minimum deposit of 40% and a £195 fee.

The price gap between loans that insist on a big deposit and those that allow a small deposit is also getting narrower. The difference in rates between the average two-year fix with a loan to value (LTV) ratio of 60% and 90% has fallen by 0.93 percentage points to 1.03 points in just two years, according to Moneyfacts. Charlotte Nelson, finance expert at Moneyfacts.co.uk, says: “The fact that the difference in rates between two-year fixed 60% and 90% LTV mortgages is shrinking is excellent news for borrowers with small deposits. With the lowest two-year fixed rate at 90% LTV standing at 1.99%, those with a deposit of just 10% can secure a rate that was previously reserved for those with much greater equity in their home.”

The cheaper deals on offer can make a big difference to monthly mortgage payments. For example, a borrower with a £250,000 loan could save £107 a month, or £1284 a year, if they took out the Yorkshire deal at 1.14%, compared with the average two-year mortgage with a minimum 35% deposit, which charges interest of 2.02% and a fee of £995. At the end of the two-year term, the borrower could save a total of £2218, even taking into account the higher fee.

Or, borrowers could put the savings towards mortgage overpayments and pay off the debt quicker. They would then reduce the term of the loan and the total interest paid. If, for example, you overpaid the Yorkshire mortgage by £107 per month, you would save a total of £4455 in interest and clear the debt two years and ten months early, based on a loan size of £250,000 and an original mortgage term of 25 years.

Overpayments when rates are low make financial sense for many people. Hollingworth says: “Overpaying, even by a small amount, can make good inroads into the outstanding mortgage balance. It can also help borrowers deal with potential rate rises in the future.” For example, a borrower with a £150,000 repayment mortgage at a rate of 3% over 25 years would be making monthly payments of £711.32. Overpaying by £100 a month would reduce the interest payable over the life of the loan by £11,843 and the mortgage would be repaid four years and two months early. Increasing the overpayment to £200 a month would cut the interest by £19,894 and the mortgage would be repaid seven years and two months early.

Overpayments are particularly cost effective if your mortgage rate is higher than the rate you could earn if you put the money into a savings account – and the average easy access savings rate is now 0.57%, well below the typical mortgage rate. David Carmichael, director of Taylor Carmichael Financial Services, the Glasgow-based mortgage specialist, says: “With savings rates so poor, for many borrowers even a modest monthly overpayment can reduce their mortgage term and of course reduce the total interest paid over the term of the mortgage.”

Most lenders allow you to make overpayments of up to 10% of the mortgage amount each year without penalty, either every month or as a lump sum. Some loans are even more flexible, but it’s worth checking the details your lender. It’s also a good idea to clear any more expensive debts, such as credit cards, first. And don’t forget to keep enough spare cash aside in case of an emergency.

Overpayments to mortgages remain hugely popular in the present Scottish mortgage market for many borrowers, although for others it is an opportunity they are missing out on. For those of us with access to larger lump sums it can also be hugely beneficial to consider larger lump sum overpayments when affordable.

While the ‘holy grail’ of clearing our mortgage appeals to every borrower, we do of course have to balance this with some notes of caution.

Always check the lender and product rules to avoid unnecessary ‘Early repayment charges, and consider personal plans and circumstances in terms of retaining or accumulating some savings for emergencies or future plans.

“Overpaying may not be practical or attractive to every borrower, but for many it can be an effective strategy with significant benefits during the mortgage term.”

Low cost fixed rates remain available in the 2016 marketplace. The market is competitive and there has been a big improvement in terms of low rates being accessible at all LTV thresholds.

At 60% Barclays can offer a re-mortgage package with a £999 fee and access to a 2 year fixed rate of 1.43% or a 5 year fixed rate of 2.29%. Even at 90%, platform homeloans have a Broker exclusive fixed for 2 years at 2.29%, although this carries a £1499 fee.

With many lenders having slightly higher SVR rates, there remain exciting opportunities for borrowers within the re-mortgage sector of the market to gain a vastly improved deal.

Low rates are of course continuing to help clients move home and benefit from affordable monthly payments often fixed over longer periods of time, offering peace of mind for a number of years.

CASE STUDY

DAVID Leck is only 25 years old but he has recently bought a one-bedroom flat in Paisley with a mortgage from Yorkshire Building Society.

"I wasn't really interested in buying a property but then I worked out that my monthly rent was more expensive than a mortgage, so it made sense," he says.

It took David, who works in financial services, about two years to save up for a 10 per cent deposit and he chose a two-year deal fixed at 2.74 per cent with £750 cashback.

David says: "I think it's a good time to fix because rates are unlikely to get much lower - - and could get higher. I didn't want to fix for longer than two years in case my circumstances change."

David has also opted to overpay his mortgage while rates are low and the monthly payments are affordable.

"If I overpay, ultimately, I will pay less interest. I will also have more equity in my home if I decide to sell in a couple of years," he says.

'"The fact that the difference in rates is shrinking is excellent news for borrowers with small deposits