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Low rate mortgage deals vanish, but it’s not bad news for all
Darren Cook, Head of mortgage research at moneyfacts.co.uk, investigates the use of the ‘low rate - high fee’ mortgage products, and takes a look at when they become a poor deal.
“As competition drives down mortgage interest rates, some lenders now offer loss leading headline interest rates, off set with high set up fees. Today flat fees can be as high as £2,499 and percentage fees up to 2.50%. But is the discounted interest rate enough to make them a good deal?
“The current moneyfacts.co.uk, best buy two year fixed rate comes from Britannia, offering 4.64% with a reasonable fee of £399. Taking the average UK mortgage of £150K, and basing our example on a repayment mortgage over 25 years, it is clear that low rate is not always best.
Lender |
Rate |
Term |
Fee |
True cost over 2 years |
Additional cost over 2 years |
Britannia BS |
4.64% |
For 2 years |
£399 |
£20,696.04 |
N/A |
Northern Rock |
3.99% |
1.12.08 |
2.5% = £3750 |
£22,732.32 |
£2,036.28 |
Nationwide |
4.47% |
For 2 years |
£21,447.80 |
£751.76 |
|
Halifax |
4.59% |
31.12.08 |
£9991 |
£21,193.32 |
£497.28 |
Source:www.moneyfacts.co.uk
Figures Correct at 30.10.06
“So for Mr Average, opting for the Britannia mortgage at the higher interest rate provides a cost saving of between £500 and £2,000 over two years, based on the examples above. However, should your mortgage borrowing be significantly higher, this low rate high fee combination could work in your favour.
“It is vital in this instance that you do your maths – calculate the break-even point whereby you are getting a low enough rate for the size of your mortgage, which makes the high fee less relevant. Your IFA should be looking at this for you, or you can visit www.moneyfacts.co.uk where you can simply and easily calculate the true cost of over 8,500 mortgage deals. But be warned that lenders are sometimes creative with their product design and cap the maximum advance just below the break-even point, so it’s win-win for the lender.
“So don’t be lured by low interest rates, if the deal looks to good too be true, it often is. These low rate offers are not for the mass-market and only provide financial benefit to those with larger than average mortgages. With a few lenders beginning to withdraw low rate high fee products, it is a welcome move, which should avoid many consumers walking into these deals unaware of the true cost or being misled by these low rate offers.
“Choosing your mortgage deal is one of the biggest financial decisions of your life. Take the time to do your homework, shop around and make sure you get the right deal for your circumstances.”
NOTES TO EDITORS:
Moneyfacts Group
Moneyfacts is the UK’s leading independent provider of personal financial information and our data is used and trusted throughout the financial industry.
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