We often see mortgage rates that stand out because they are so low and subsequently lead the best buys as published by the National Press. Unfortunately these deals that seem too good to be true are sometimes just that. It is advisable to look at the whole deal and its implications rather than just the headline rate. If the loan offered is a variable rate loan the first thing to ask yourself is whether you could afford the payments if interest rates rose.
If you are still comfortable after answering this question we move onto the fee charged to buy into the loan. The question to ask is, does the fee when added to the loan represent good value for money? For example a market leading rate of 2.39% for 2 years on a tracker basis from the Chelsea Building Society attaches a whooping arrangement fee of £1,939. This fee added may mean that your payments are not much higher, but it must be remembered that this extra amount is with you for the rest of your mortgage which could be for twenty five years plus. It is worthwhile therefore looking at other deals that although have higher rates may offer overall better value particularly over the initial 2 years.
Sometimes borrowers just want the lowest possible payments that they can get in the early years of the mortgage. This is because they may be under financial pressure at outset that may ease after a couple of years, when for example a loan is repaid or they are maybe earning more within an occupational scheme with incremental pay rises. In these circumstances the low rate with high fees may be suitable. Also if the fee attached to the mortgage is a fixed fee and not charged as a percentage of a loan, then the larger the loan the better value the high fee becomes. On the flip side small loans are very unlikely to find value with market leading rates and high fees.
As mentioned earlier it does pay to look at the whole mortgage and try to look past the headline rate. We have looked at the fees attached typically on short term deals, but it is also worth noting the rate you will be charged when the initial deal ends. The one we have featured with the Chelsea Building Society reverted to a non-competitive rate of 5.79% after 2 years. At this point you either accept this rate or look for another deal. It is worth mentioning that this rate is a very high variable rate when you consider Nationwide Building Society’s variable rate is 3.99%. However, particularly with the changes with lending due to the financial crisis house price falls and the likelihood of further tightening, a lot of borrowers may find it difficult to remortgage. So although many of us may find it tempting to grab a short term deal, it may be prudent for some to opt for longer deals, whether this takes the shape of fixed rates, discounts or tracker deals.
Recently a lot of lenders headed by Halifax have announced plans to increase variable rates, even though the bank rate has not risen. It is more important than ever to be vigilant when taking out your mortgage, as it could be argued that lenders are moving the goal posts and you may be with your mortgage provider for longer than you planned. So make sure that you have a mortgage that has clarity, and limits the ability of the lender to raise rates when bank rates have not risen. Adopt the maxim that all that glitters is not always gold when searching for a mortgage.
Kieron Bassett Financial Services has two Independent Financial Advisers who specialise in mortgages. Contact us on (01524) 832057, via e-mail info@kieronbassett.com or visit www.kieronbassett.com.
Kieron Bassett DipPFS
5th March 2012
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