What's the catch with ultra-low mortgage rates?
Mortgage rates are continuing to tumble. West Bromwich Building Society has launched the "cheapest ever" mortgage of its kind, with a two-year fixed rate (at 60% loan-to-value) of 1.48%, lasting until September 2015.
More competition in the market, and the cheap money that has been pumped into the banking system through the Funding for Lending scheme, has resulted in a flurry of deals on first-time buyer loans, buy-to-let mortgages, fixed-rates, trackers and variable rate mortgages.
Lenders are clambering over one another to secure the lowest headline rate. For example, West Brom's deal came just a week after HSBC launched the previous "cheapest ever" two-year fix at 1.49% for a 60% loan-to-value (LTV) mortgage.
But the trade off for such low rates is the hefty fees that accompany them. For example, the West Brom has a £2,494 fee on a modest maximum loan size of £250,000. The HSBC deal comes with fees of £1,999, though you can borrow up to £500,000.
In fact, Get help finding the best mortgage for you, all of the 10 lowest-rate two-year fixes come with fees of at least £1,499.
David Hollingworth, at mortgage broker Fine & Country says that depending on the mortgage size and duration, fees can obliterate any savings that come about from low rates.
Ray Boulger, senior technical analyst at broker Jon Charcol, explains: "Basically the smaller the mortgage and the shorter the term of the initial deal the more important the fee and also other costs. For example, the impact of a £2,000 fee on a £500,000 mortgage on a five-year fixed rate is to reduce the effective rate by 0.08%, whereas the same fee on a £100,000 mortgage on a two-year fixed rate reduces the effective rate by a massive 1%."
Hollingworth says the West Brom and HSBC two-year fixes may not suit lots of borrowers due to the high fees and especially because of the West Brom loan cap of £250,000. Instead, he prefers the Norwich and Peterborough building Society's alternative, which has a rate of 1.99%.
"The rate may be around 0.5 basis points higher than the other two deals but at 65% LTV with a total loan size of £1 million, it has an arrangement fee of just £295. It also comes with a free valuation and free legals for remortgages and £200 cashback."
"Low rates may grab the headlines but it's crucial that borrowers take account of arrangement fees, booking fees, completion fees and the overall cost of the mortgage, not just the monthly payments if they're going to get value for money.
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.
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.
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.
A charge some brokers (and, increasingly, lenders) make for arranging your loan or mortgage, either as a flat fee or a percentage of the amount you wish to borrow. In order to look ultra-competitive in the best-buy tables, some mortgage lenders will offer mortgages with an attractive low rate and recoup any losses with a hefty arrangement fee.