The Yorkshire Building Society just launched the UK's lowest ever mortgage rate

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LONDON — The Yorkshire Building Society has started offering mortgages at 0.89% – the lowest rate ever in the UK.

The product is a two-year variable rate mortgage, which means it can change to reflect moves in the Bank of England's base rate, and is only available for homebuyers who can stump up a minimum 35% deposit for the property.

The bank's usual variable rate is 4.74%, so the new mortgage represents a discount of around 81%.

A mortgage of £349,000 on the rate would cost £1,253 a month for the first two years, with payments increasing to £1,889 afterwards.

It is available on loans of up to £5 million, the bank said, and is subject to a one-off fee of £1,495.

James Farrow, senior mortgage manager at Yorkshire Building Society, said: "The cost of funding has fallen in recent weeks and as a financially strong building society with no external shareholders to satisfy we have the ability to pass this on to borrowers."

Some analysts have pointed out that low short-term interest rates could be storing up problems in the UK economy. Interest rates and unemployment are at record low levels, as are mortgage arrears – which have more than halved since the depths of the financial crisis.

But house prices have risen substantially and borrowers could be in for a shock if the Bank of England decided to start raising rates..

According to Samuel Tombs, chief UK economist at Pantheon Macroeconomics, the record low interest rates "have instilled complacency in markets about households’ ability to maintain mortgage payments if the economy weakens significantly," said Tombs.

"Mortgage arrears likely would rise sharply if the slowdown in the labour market becomes more pernicious and joblessness begins to rise." 

While mortgage repayments have been lowered by near-zero Bank of England interest rates, the overall amount of debt relative to income borrowers have had to take on to buy a home has skyrocketed along with house prices.

And here is the chart:

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