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'Cheapest' ever mortgage has a big catch
West Brom Building Society threw down the gauntlet to other mortgage lenders last week when it launched a two-year fixed rate mortgage at just 1.48%. It undercut the previous 'best buy' two-year fix of 1.49% offered by HSBC, and is now the lowest rate ever offered on such a mortgage.
But both deals come with a massive sting in the tail: sky-high arrangement fees. To get the West Brom deal borrowers need to pay £2,494 in fees while HSBC charges £1,999.
The cheap rate but high fee combination highlights once again the need to compare the total costs of a mortgage deal before making a decision.
Big fees
A quick look at the best buy tables shows that West Brom and HSBC are not the only lenders charging four-figure fees to borrowers looking for a low-rate mortgage.
The table below shows some of the biggest fees on the market:
Lender | Mortgage type | Rate | Fee |
West Brom Building Society | Two-year fix | 1.48% | £2,494 |
Two-year fix | 1.49% | £1,999 | |
Two-year fix | 1.89% | £1,999 | |
Halifax | Five-year fix | 2.45% | £1,995 |
Tesco Bank | Two-year fix | 1.74% | £1,495 |
Two-year fix | 1.66% | £1,475 |
Source: London & Country
All of the above mortgages are for residential mainstream deals. Fees can be even bigger for buy-to-let mortgages. For example, The Mortgage Works charges a whopping £3,750 for a two-year fix at 2.49%. Principality Building Society also charges set-up fees of £3,750 on its two-year base rate tracker at 1.89% above bank rate.
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What are fees for?
Upfront mortgage fees are supposedly for the costs associated with administering a mortgage. Fees include booking fees, administration fees, arrangement fees, valuation fees and completion fees.
However, as the fees vary so much – including between different products with the same lender – it’s safe to assume that the fee does not to relate to the cost of carrying out a certain task, but is just another way for a mortgage lender to price a product or make money.
In most cases upfront fees can be added to the mortgage, but doing this will mean paying interest on the amount over the term of the loan, so up to 25 years in some cases.
Doing the sums
When mortgage lenders advertise products, they have to display the deal’s APR or annual percentage rate. In theory the APR makes it simple to compare products as it takes into account interest rates and fees over the product’s term. But, in practise, it is not a useful tool for comparison because it assumes a 25-year term when most borrowers switch mortgage products much more often than that.
To compare costs borrowers should calculate what they will pay during the tied-in period. So, if you have a two-year fixed rate mortgage and there are no early redemption penalties after two years, you should work out the total monthly payments plus fees over this time period and compare this with other two-year mortgages.
For example West Brom’s 1.48% deal will cost someone with a £150,000 repayment mortgage £598.49 a month or £14,363.76 over two years. Add on the £2,494 fee and the total cost comes to £16,857.76.
Chelsea Building Society has a two-year fix at 1.84%. This would cost someone with a £150,000 mortgage £624.16 a month or £14,979.84 over two years. Fees on the deal come to £875, but if house purchases get £500 cashback, meaning the fee is just £375. That takes the total over two years to £15,354.84.
So while the rate on the Chelsea mortgage has a higher interest rate, it actually works out £1,502.92 cheaper over the two-year tied-in period than West Brom’s record 'cheap' mortgage.
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How long should you fix for?
In any case, a two-year fix might not be the best type of mortgage to opt for at the moment. Last week Bank of England Governor Mark Carney said interest rates are unlikely to rise until the end of 2016 and then only if unemployment falls to 7%.
So borrowers would be better off opting for a five-year fix to protect them from a rate rise rather than a two-year fix – a period within which rates are almost certain to remain the same anyway.
Trackers are also likely to remain popular while it looks unlikely rates will rise anytime soon. Santander is currently offering a lifetime tracker at 2.19% above bank rate, giving a current pay rate of 2.69%. It has an arrangement fee of £495.
Whatever kind of mortgage you choose the golden rule remains the same: take both the interest rate and fees into account when comparing mortgages.
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This article aims to give information, not advice. Always do your own research and/or seek out advice from a regulated broker, before acting on anything contained in this article.
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