Best mortgage providers revealed
Home is where the heart is, but for the average UK homeowner, home is also where you can get a mortgage. The average mortgage is £117,000, according to recent figures from the Council of Mortgage Lenders (CML).
This is £10,000 less than the average back in 2007, but for most homebuyers the main issue with mortgages is less the total amount of the loan and more about finding the right product for them.
After a tough couple of years, the number of mortgages available is climbing again, with 2,076 products available in April of this year – an increase of 71.7% since the all-time low of April last year, when there were only 1,209 mortgages available.
Clearly the market is still subdued, but it's encouraging to see things are moving in the right direction again, with gross mortgage lending rising an estimated 3% to £11.5 billion since March 2009, according to the CML.
Meanwhile, the stamp-duty holiday for first-time buyers on properties valued up to £250,000 is welcome too – although it's not enough to lift the whole market by itself.
Statistics aside, buying a property and looking for a new deal for your existing mortgage is a huge financial commitment. And that is why we run the Moneywise Mortgage Awards.
These are aimed at helping you find the right mortgage, so we haven't just looked at the flashy advertised interest rates, we've also taken into account the charges, customer service and extras that the best mortgage products offer – all to ensure we find the best deals for you.
BEST LENDER FOR FIXED RATES:
WINNER - The Co-operative Bank
RUNNER UP - Royal Bank of Scotland
The average two-year fixed rate has hit its lowest level since April 2008, according to moneysupermarket.com. At 4.62%, this would reduce a fixed repayment on a £150,000 mortgage by £316 (paying £853).
Three and five-year deals have also come down, and given that many experts believe the base rate will go up by the end of the year, securing a competitive fixed rate while levels are low could make sense.
This year's winner, The Co-operative Bank, is one of the few lenders to offer a 10-year fixed rate. Whether you'd want to be tied to a rate for that long is debatable, but there's no question the provider offers market-leading rates.
"It has consistently offered a competitive range of fixed rates during the year," says Ray Boulger, senior technical director at broker John Charcol.
Royal Bank of Scotland, runner-up in this category, is praised for its competitive rates too.
Katie Tucker, chief operating officer at Private Finance, says: "The rates are competitive and it offers good, long-end dates on its deals, in conjunction with sub-£500 flat arrangement fees."
BEST LENDER FOR DISCOUNT MORTGAGES:
WINNER - Market Harborough Building Society
RUNNER UP - Marsden Building Society
While the base rate remains low, the main advantage of discount mortgages is that you'll pay less than the standard variable rate, or SVR, because the discount is linked to this.
However, if the base rate increases then so will the lenders' SVRs, and with this the discount rate.
There are often early repayment charges during the discounted period, should you switch. So the fact that this year's winner, Market Harborough Building Society, frequently doesn't include early repayment charges on its discount products is a big coup.
"Market Harborough has shown that smaller lenders can still offer consistently competitive rates, and something a bit different from the competition," says David Hollingworth, mortgage specialist for London & Country.
Marsden Building Society came a close second, with Boulger favouring it for its offset mortgage option with discounts. Tucker adds: "Marsden often features in the top 10 for discount best buys, and is available through several mortgage clubs.
"Its high maximum LTVs and sub-£800 arrangement costs with free legals makes its deals attractive."
BEST LENDER FOR CURRENT ACCOUNT OFFSET MORTGAGES
WINNER - First Direct
RUNNER UP - Yorkshire Building Society
Homeowners who fall into the new 50p tax bracket could use an offset mortgage to counter some of their losses.
Offset mortgages work by combining your savings and mortgage so that you only pay interest on the mortgage amount, minus the amount of savings.
Given the low interest rates on savings (easy-access rates can be as little as 0.10% with, for example, Nationwide's e-savings), if you've got the money, an offset mortgage could be a way of combating this.
Last year's winner, First Direct, takes top spot again. "First Direct's rates are fantastic and its consumer reputation is strong," says Tucker.
Hollingworth is impressed with the lender's competitive pricing on its offset products, which are often better priced than standard offerings.
He also praises runner-up Yorkshire Building Society, whose wide range of offset deals charge just 0.1% more than its non-offset products.
"Yorkshire Building Society has produced a very solid offset proposition, with some well-priced fixed products," says Hollingworth. "It also offers the rare option for parents to help their children by offsetting their own savings against the mortgage."
BEST LENDER FOR BUY-TO-LET MORTGAGES
WINNER - The Mortgage Works
RUNNER UP - Coventry Building Society
Despite the buy-to-let bubble bursting in the recession and the market contracting substantially (in 2007 the number of new buy-to-let mortgages was 346,000, compared with 93,500 last year), the last quarter of 2009 saw some slight growth.
The low base rate has benefited buy-to-let mortgage holders, the majority of whom pay interest-only.
Finding a lender willing to lend on a buy-to-let mortgage is tough, though, and many have withdrawn their buy-to-let products or greatly reduced their range. Our winner this year, The Mortgage Works, has defied this trend.
"The Mortgage Works offers a competitive product range with market-leading criteria," says Sally Laker, managing director at mortgage broker Mortgage Intelligence.
She adds: "It continuously looks at product development and niche areas of the market to launch into." One such niche area is properties in need of light refurbishment.
Laker is also positive about The Mortgage Works' "excellent service".
Runner up in this category is Coventry Building Society – another regular on the best-buy tables in terms of rates. However, it also wins praise for its competitive pricing, with its flat-rate fees, free valuation and free legal costs on remortgages.
"Coventry Building Society has maintained a strong showing in the buy-to-let market with a well-priced range that doesn't carry the high fees that have proliferated elsewhere," says Hollingworth.
Another consideration with buy-to-let products is the potential limits on portfolio value. Both winner and runner-up in this category cater for professional landlords – Coventry caters for those with no portfolio limit and The Mortgage Works gives loans of up to £1.5 million at 50%.
BEST LENDER FOR FLEXIBLE MORTGAGES
WINNER - Alliance & Leicester (Santander)
RUNNER UP - Northern Rock
A relative newcomer to the mortgage market, flexible mortgages allow homeowners to make overpayments without being hit by early repayment charges.
Homeowners also have the option to drawback these overpayments when required, make underpayments, or defer payment altogether.
Usually with lower SVRs than normal, these are ideal if you intend to pay off your mortgage before the term ends.
The winner in this category, Alliance & Leicester (Santander), manages to combine a good rate alongside fantastic flexibility.
"It's one of the few lenders that offers fully flexible mortgages, with unlimited early repayment charges and free overpayments – albeit only on its tracker range," says Boulger.
"There's no underwriting when borrowers want to borrow back overpayments, and the rates have been competitive."
Second-placed Northern Rock, which also came second last year, is popular with borrowers requiring larger loans, offering 80% LTV on up to £1 million.
Boulger says: "Northern Rock's flexible mortgage offers full flexible features alongside a competitive product. It has identified that not all flexible features are always required so has produced a range where the rates are keener. However, it only has a 10% overpayment facility."
BEST LENDER FOR LIFETIME TRACKER MORTGAGES
WINNER - Woolwich
RUNNER UP - First Direct
The Bank of England base rate last changed in March 2009 and it's not expected to go up again until the latter part of 2010. However, what's bad news for savers is great news for homeowners.
Legal & General's latest quarterly Mortgage Purchase Index highlights the big shift towards tracker mortgages, with 43% of residential mortgages tracker rates compared with 17% in the previous quarter.
Even though fixed rates are relatively low, they are still significantly higher than tracker deals, so switching to one of these products is attractive in the short term – although this could change if the base rate rises sooner or more sharply than predicted.
In first place, for the second year running, is Woolwich. All its products come with a free valuation and there are no legal fees on remortgages.
"Woolwich has consistently had market-leading lifetime trackers throughout the year, and if you add to this the flexible features it offers, this has made these products extremely attractive," says Laker.
First Direct is this year's runner-up, praised for its consistent rates and low fees. "First Direct has consistently been the market leader for LTVs up to 65%, and all its tracker rates are on an offset basis as a bonus. It also has no early repayment charges," says Boulger.
BEST LENDER FOR FIRST-TIME BUYERS
WINNER - HSBC
RUNNERS UP - RBS, Clydesdale Bank, Yorkshire Bank
First-time buyer mortgages make up just 7% of the market, according to Boulger, highlighting the struggle prospective homeowners face in saving up a significant enough deposit to get a good mortgage deal.
However, there are some silver linings with the stamp duty concession, low base rate, falling property values and a smaller but more competitive market.
This year's winner, HSBC, is particularly generous towards customers who already have a current account with the bank.
"HSBC has consistently offered strong rates for homebuyers, including high LTV deals with low fees that will appeal to first-time buyers," says Hollingworth.
There are three runners-up in this category. RBS is commended by Tucker for its "competitive rates at high LTVs above 85%". Clydesdale Bank and sister-lender Yorkshire Bank again offer impressive LTVs (both offer the same products).
"They have even maintained a deal at 95% LTV when others have withdrawn," says Hollingworth.
BEST LENDER FOR REMORTGAGES
WINNER - Alliance & Leicester (Santander)
RUNNER UP - Yorkshire Building Society
Everyone wants to get the best deal, and comparing financial products has become the norm. Switching your mortgage to another lender could help you save money on your mortgage bills, but it's important to factor in any additional fees and charges.
Alliance & Leicester takes top spot, thanks to its free valuations and legal services. "Not only are the rates good but the range of fee packages offers something for everyone," says Hollingworth.
Yorkshire Building Society and HSBC are in joint second place. Tucker commends the former for its competitive rates: "At £495, its typical fee is exceptionally low, and remortgagers also get a free valuation and legal fees."
Boulger praises the latter's "innovative fixed rates that match the borrower's previous rate and adjust the fee to make its required margin".
Ray Boulger: senior technical director at mortgage broker John Charcol
David Hollingworth: mortgage specialist at broker London & Country
Sally Laker: managing director of mortgage broker Mortage Intelligence
Katie Tucker: chief operating officer at Private Finance
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
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 catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
A way of combining a mortgage and savings so the savings “offset” and reduce the mortgage. Rather than earning interest on savings, the savings reduce the mortgage and the interest paid on the borrowing, so savings are effectively earning interest at a higher rate than most mainstream savings accounts will pay. They are also tax-efficient, as savers avoid paying tax on interest that their deposits would otherwise have earned. Offset mortgages offer the disciplined borrower a great deal of flexibility, as overpayments can be made to reduce the term or monthly mortgage repayments, which can save thousands of pounds in interest payments over the mortgage term.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
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.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
This refers to the terms of your mortgage and not the interest rate you pay. Flexible mortgages offer the borrower the ability to adjust monthly payments to suit their ability to pay. Although there’s no precise definition of a flexible mortgage, it should offer: interest calculated on a daily basis; the facility to make overpayments at any time without incurring penalties; the facility to underpay; and the ability to take a payment holiday (but these may be only options if you’ve made prior overpayments). Flexible mortgages require you be disciplined in your finances and their main drawback is the flexibility comes at a price as lenders charge slightly higher rates for these types of mortgages.