How much are you actually paying for your fixed-rate mortgage?
Mortgage lenders are cutting interest rates to record lows. Indeed, Yorkshire, Chelsea and Marsden building societies have all launched sub-4% deals fixed for two years for borrowers with deposits or equity of just 10%.
But are these deals really as attractive as they seem? With average mortgage fees rising by 49.6% since 2009, it would seem not.
"Mortgages can be complex: some have fees, others don't; some charge a combination of low interest rates and high fees while others, the reverse – higher interest and lower fees," explains a spokesperson at Moneyfacts.
"Since the credit crunch, the average fee charged on a mortgage has quietly risen from an average £937 in April 2009, (the month following Bank of England base rate falling to its historic low) to the current average of £1,402 (a rise of 49.6%)."
The rise in fees can mean those mortgages that appear to be the showstopping are decidedly less so.
"In some cases, the term ‘best-buy table' is misleading," says Ray Boulger, senior technical manager at John Charcol. Many computer-driven tables are simply a list of the lowest rates. Lenders, of course, know this and many mortgage rates are subsidised by high fees. The shorter the term of the deal and the smaller the mortgage, the more impact set-up costs have on overall value to the consumer and the return to the lender."
For example, for a £200,000 mortgage on the Post Office's three-year fix at 2.68% up to 75% loan to value (LTV), the borrower will have to pay a product fee of £995, a lending fee of £195 and an early repayment charge (ERC) of 3% (in this case, £6,000). They will
also have to pay for a valuation.
The cost of your homebuyer survey will vary depending on the price of the property but can range from £300 to £1,000.
Boulger says it is important to look at other costs as well as the fee. The simplest way to compare the real value provided by different deals is to add up the total cost of interest, fees and other costs over the term of the deal, not the term of the mortgage.
For example, if we look at borrowing £120,000 over 25 years on Chelsea Building Society's two-year fix at 1.89% (60% LTV) with a £502 monthly repayment, £1,695 product fee and £205 valuation fee the total cost of the two-year deal is £13,953.
Meanwhile, borrowing £120,000 over 25 years on Norwich & Peterborough Building Society's two-year fix at 2.24% (60% LTV) with a monthly repayment of £522, £295 product fee and £224 valuation fee, the total cost of the two-year deal is £13,065, £888 cheaper than the Chelsea deal, according to moneycomms.co.uk.
Once fees and overall costs are considered, borrowers may want to think about moving quickly as often the best deals are pulled at a moment's notice. "That could be for a variety of reasons including the lender preserving service level due to increased business volume through offering best-buy rates," explains David Hollingworth, mortgage specialist at London & Country.
Despite the launch of some headline-grabbing deals at higher LTVs, the very best rates remain available to those with the biggest deposits or similar level of equity in their homes.
"If you really want a rock-bottom deal, you need to put down as much as you can as a down payment," explains Adrian Anderson, director of Anderson Harris. However, not having a huge deposit doesn't mean you can't get a competitive deal.
The Co-operative Bank has a two-year fix at 3.59% for those with a 15% deposit (no fee), for example, while Yorkshire Building Society has a two-year deal at 3.99% at 90% LTV (£495 fee) and Nationwide has a two-year fix at 4.39% at 90% LTV (£900 product fee).
"Admittedly, you can pay as little as 1.89% if you have a 40% deposit (two-year fix from Chelsea BS), but the future is looking brighter for those with more modest deposits and is likely to continue to improve," says Mark Harris, chief executive of mortgage broker SPF Private Clients.
Along with the LTV you require, the length of time you fix for can also have a bearing on whether you get the best deal. The general rule is the shorter the fixed period, the lower the rate.
"Two-year fixes really are the market leaders, with rates available below 2% but five-year fixes aren't too shabby either, with rates starting at less than 3%," says Harris. "Put in a historical context, these rates are really quite astonishing." However, Harris says more cautious borrowers could be better off taking a slightly higher rate and fixing for longer.
"It might be worth paying slightly more to get security for a longer period of time, particularly if you are concerned interest rates might rise in the next few years and you would struggle to pay the mortgage if this happens," he says. "But don't fix for longer than you are absolutely sure about, otherwise you may have to pay a hefty penalty to get out of the mortgage before the end of the fixed period."
Indeed, since fixed rates lock in borrowers it's important to give yourself some flexibility if there is a change of circumstances on the horizon. "Many borrowers find 10-year fixed deals a big commitment, whereas fiveyear deals could be a more appropriate balance," says Hollingworth. "Those locking in for just a couple of years could face higher rates when they come to the end of the fixed period."
After the fixed period, the mortgage rate will revert to the lender's standard variable rate (SVR). Currently, the average SVR is 4.86%. However, by the end of the fixed term, borrowers may be in a position to remortgage on to a better deal.
|LTV||LENDER||TYPE||INITIAL RATE||SUBSEQUENT RATE||LENDER FEE|
|70%||Woolwich BS||Two-year fixed||2.54%||3.89%||£999|
|70%||Woolwich BS||Two-year fixed||2.59%||3.89%||£999|
|80%||Newcastle BS||Two-year fixed||2.94%||5.99%||£995|
|80%||Newcastle BS||Two-year fixed||2.99%||5.99%||£995|
|90%||Skipton BS||Two-year fixed||4.49%||5.49%||£995|
Source: Uswitch.com, 26 February
MOVING TO LOWER RATES
"One of the benefits of a short-term fix for those with only a 10% deposit is that, assuming no change in the property value, on a 25-year repayment mortgage at 3.99% it only takes two and a quarter years for the LTV to fall to 85% and every 5% reduction in the LTV required means lower rates are available," explains Ray Boulger. "For example, currently two-year fixed rates up to 85% LTV start at about 3.5%."
Should you opt for a longer term than 25 years, you would pay less monthly but you would pay more back in total. For example, borrow £200,000 at 3% over 35 years and the monthly payment would be £769.70 and the total amount repayable is £323,274. But borrow over 25 years and while the monthly payments shoot up to £984.42, the total amount repayable drops to £295,326. That's a saving of nearly £28,000.
"However there's nothing to stop you from opting for a 35-year term when you take out your first mortgage when your budget is tight but then reducing the term at a later date when your income has increased and you have a greater disposable income," explains Andrew Hagger, director of moneycomms.co.uk.
With show-stopping rates now topping the best-buy tables, the message to consumers is proceed with care – and always watch out for fees.
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 “traditional” mortgage, where the monthly repayments entail of repaying the capital amount borrowed as well as the accrued interest, so that during the loan period the capital debt is gradually paid off so by the end of the term the mortgage has been fully repaid. One advantage of a repayment mortgage is that it removes the risk of having a parallel investment (such as an endowment policy or pension), the performance of which is dependent on the stockmarket, such as with an interest-only mortgage.
Loan to value
The LTV shows how much of a property is being financed and is also a way to tell how much equity you have in a property. The higher the LTV ratio the greater the risk for the lender, so borrowers with small deposits or not much equity in the property will be charged higher interest rates than borrowers with large deposits. The LTV ratio is calculated by dividing the loan value by the property value and then multiplying by 100. For example, a £140,000 loan on a £200,000 property is a LTV of 70%.
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.
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.