Best deals for home movers
When moving house, you’ll hopefully have a decent equity stake in the property you’re selling so you’ll be in a strong position to secure a cheaper mortgage. We’ve scanned the market to look at some of the best deals when buying your next home.
We’ll be considering a £300,000 property purchase, borrowing at 60% loan-to-value as the buyer has £120,000 from the sale of their previous home. They’ve chosen a 25-year mortgage term. They’ve also decided to pay any initial fees up-front so they don’t need to pay interest on the charges.
It’s crucial to consider the overall cost of a mortgage, and not just focus on the headline rate. There are dozens of ultra-low fee deals, though in many cases buyers will end up paying more because of chunky four-figure fees.
For example, HSBC has broken through the 1% barrier, charging just 0.99% until August 2018. That’ll cost £678 a month, though eye-watering fees of £1,726 mean our buyer will pay £17,998 over the first two years. The standard variable rate (SVR) is 3.69%, so repayments will rise to £899 in October 2018, if the buyer doesn’t remortgage and the rate doesn’t change.
Over the first two years, our buyer would pay substantially less if they went for Yorkshire Building Society’s (YBS) 1.69% two-year fixed rate deal, even though the interest rate is 0.7% higher. That has monthly repayments of £736, or £58 more than HSBC each month. However, YBS charges no fees and £250 cashback, so the two-year cost is £17,414, almost £500 cheaper than HSBC’s headline grabbing rate.
However, the YBS deal has a significantly higher 4.74% SVR, so our buyer will be punished if they don’t remortgage when the fixed rate period ends. If rates don’t change, monthly payments will rise to £1,002, a far bigger hike than HSBC will impose on its customers.
Longer fixed-rate offers
It’s possible to lock in a mortgage rate until 2026, which can ensure you know exactly what your repayments will be. These long-term deals are cheaper than they’ve ever been before, but the security of knowing what you’ll pay for a decade doesn’t come free and rates are considerably higher than for the best two year deals.
The best fee-free deal is HSBC’s ten-year fix at 2.49%. That’ll cost £807 per month, or £19,368 over two years. When the fixed-rate period ends monthly repayments rise to £876 (the SVR is 3.69%), assuming rates don’t change and our buyer hasn’t switched to a better deal.
Alternatively, the West Brom Building Society has a fee-free 2.59% fix until January 2017. That will cost £816 a month, or £19,584 over two years. The SVR is 4.24%, implying repayments will increase to £898 in 2026.
It’s much cheaper to fix a rate for five years, although you will be relying on cheap mortgages still being available in 2021 when your mortgage switches to an expensive SVR.
HSBC will let borrowers lock in a 1.99% rate until December 2021, with no up-front fees. Monthly repayments are £762 and the cost over two years is £18,288. The SVR is 3.69%, so repayments will rise to £889 in 2021, assuming no change.
The West Brom Building Society charges 1.59% (a 2.4% discount on its 3.99% SVR) until November 2018. If rates don’t change monthly repayments will be £728. There’s no initial fee, so the cost over two years will be £17,472. After the discounted period monthly repayments rise to £931, assuming the borrower doesn’t remortgage and the SVR doesn’t change.
Alternatively, the Melton Building Society charges 1.50% (discounted from 4.99%) for three years, with £290 fees. The cost over two years is £17,570, if monthly repayments don’t increase from £720. When the SVR takes effect, borrowers will need to repay £1,025 per month, if rates don’t change.
If you’re looking for interest-only options, remember the rules are now a lot stricter and you’ll need to show a well-thought out plan for repaying the capital at the end of the mortgage. Monthly repayments are much lower than with capital repayment, but you'll pay more interest on an interest-only mortgage in the long run.
Not every provider will lend on an interest only basis, so if you’re looking for one it’s best to speak to a mortgage broker. Our mortgage tool can help you get a feel for the rates on offer.
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Every mortgage lender has a standard variable rate of interest, or SVR, on which it bases all its mortgage deals, including fixed and discounted rate and tracker mortgages. When special deals come to an end, the terms of the deal usually state that the borrower has to pay the lender’s SVR for a period of time or pay redemption penalties. The lender’s SVR is, in turn, based on the Bank of England’s base lending rate decided by the Bank’s Monetary Policy Committee (MPC). Every time the MPC raises its rate, mortgage lenders generally increase their SVR by the same amount but when the MPC lowers its rate, lenders are often slow to pass this on or don’t pass on the full cut to borrowers.
A loan in which the borrower pays only the interest on the sum borrowed for the life of the mortgage but, at the end of the mortgage term, they still owe what they originally borrowed as this remains unchanged. The advantage of an interest-only mortgage is the monthly repayment is considerably lower than for a comparable repayment mortgage. Lenders generally insist the borrower also invests in an endowment, ISA or pension savings policy that, on maturity, is intended to pay off the capital loan.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.