First Direct cheapest five year fixed rate mortgage ever

The new five-year fixed rate mortgage from First Direct offers borrowers a combination of medium term payment security and a staggeringly low rate.

I’ve been proved wrong before, but this time I really don’t think mortgage rates can get much lower than this.

What’s the deal?

The First Direct mortgage is a five-year fixed rate deal, priced at 2.69%, available up to 65% of the property’s value.

On a typical 25-year £150,000 repayment mortgage this would mean monthly repayments of just £687. And on a larger £300,000 homeloan they would be £1,375 a month.

In other words the mortgage is cheap to service on an ongoing basis.

Even better, your interest rate is locked for five years so your monthly repayments can’t go up.

It sounds too good to be true, so what’s the catch?

£2,000 set-up fee!

The mortgage arrangement fee for this deal is an eye-watering £1,999, which can be paid upfront or added to the loan. If you pay it upfront it obviously puts a seriously hole in your finances. But if you add it to the homeloan you pay interest on the fee over the long-term, and therefore it ends up costing more.

This fee is very expensive indeed and it will put many off, but First Direct isn’t the only lender to charge borrowers big time to set up low rate mortgages, as the tables below illustrate.

It’s simply a feature of today’s mortgage market that lenders use two different pricing mechanisms to make up a deal – the rate and the fee.

That’s why it’s so important to work out the total cost of a mortgage deal based on your specific level of borrowing. As a general rule of thumb, those borrowing a modest amount will usually find that a large fee has a high impact on their overall costs. This might mean they are better off taking a mortgage with a slightly higher rate if it comes with a lower fee.

Take today’s new five-year fix from First Direct. We know that it would mean monthly repayments of £687 on a £150,000 mortgage. Over five years this would cost £41,220, plus the fee of £1,999 means a total cost of £43,219.

Alternatively you could go for a deal with a lower fee, even if it came with a slightly higher rate. For example the Post Office has a five-year fixed rate at a higher 2.74%, but it comes with a much lower £995 (though you do need 40% upfront to get it).

While the monthly repayments of £691 are a bit more each month and over five years add up to £41,460, factor in the much smaller fee of £995 and the overall cost of £42,455 is actually lower. So it’s better for those with the extra 5% deposit needed to bag it.

At the other end of the spectrum, borrowers with a large mortgage are usually better off choosing a lower rate, even if it comes with a large fee.

Also bear in mind that although high fees can have a large impact on the overall cost of a mortgage, this is more of a problem on short deals, like two-year fixed rates. A £2,000 fee spread over five years has a smaller effect than it does over two – and of course, you’ll need to pay another arrangement fee if you switch again after a two-year fix.

Can you get it?

One thing to consider with the First Direct mortgage is whether you can actually access it. The mortgage is only available to borrowers with a 35% deposit or level of equity, which will exclude many from the market.

However, most lenders reserve their best deals for those with at least 40% upfront, so in fact this mortgage is slightly more accessible than most of the current best buys.

It’s also worth noting that you will need a clean credit history to get the deal. You’ll also struggle if you are newly self-employed and therefore don’t have historic accounts in place to prove your income.

Should you get it?

Remember with any medium-term fixed rate mortgage you are effectively tied into the deal for the duration of the fixed rate – in this case five years.

That’s fine if you are sure you’ll want the mortgage for that long, but nobody knows what’s around the corner. If you do need to remortgage (because of relocation or a relationship breakdown) you may face early repayment charges, and they can be extremely costly.

With the First Direct deal, you will pay 3% if you leave the mortgage in year one, and 2% in subsequent years.

Five-year fixed rates have plummeted in the last year and offer a tempting combination of payment security and low rates. For those who want to lock in for that long, they are now recommended by most mortgage experts.

Below are some of the best deals, whatever your deposit:

Large deposit

Lender	Rate	Fee	Max LTV
First Direct	2.69%	£1,999	65%
Post Office	2.74%	£995	60%
HSBC	2.78%	£1,999	60%
The Co-op Bank	2.79%	£999	60%
Chelsea BS	2.89%	£1,695	75%
Coventry BS	2.95%	£999	65%
Post Office	2.98%	£995	75%
First Direct	2.99%	£999	65%
Yorkshire BS	2.99%	£995	75%
First Direct	3.09%	£499	65%
HSBC	3.19%	£499	60%
HSBC	3.19%	£599	70%
Coventry BS	3.19%	£999	70%
Post Office	3.35%	Fee-free	60%
First Direct	3.39%	Fee-free	65%
The Co-op Bank	3.39%	Fee-free	75%
HSBC	3.49%	Fee-free	70%
Post Office	3.49%	Fee-free	75%

Medium-sized deposit

Lender	Rate	Fee	Max LTV
Post Office	3.73%	£995	80%
HSBC	3.89%	£599	80%
The Co-op Bank	3.79%	£999	85%
The Co-op Bank	3.89%	Fee-free	85%
Leeds BS	3.98%	£999	80%
Chelsea BS	4.04%	£1,695	85%
Yorkshire BS	4.14%	£995	85%
HSBC	4.19%	Fee-free	80%
Norwich & Peterborough BS	4.29%	£795	85%
Yorkshire BS	4.69%*	Fee-free	85%

*First-time buyers only

Small deposit

Lender	Rate	Fee	Max LTV
Hanley Economic BS	4.20%	Fee-free	90%
Loughborough BS	4.24%	£599	90%
Norwich & Peterborough BS	4.79%	£295	90%
Chelsea BS	4.39%	£1,695	90%
First Direct	4.59%%	Fee-free	90%
Yorkshire BS	4.49%	£995	90%
The Co-op Bank	4.79%	Fee-free	90%
Coventry BS	4.79%	£999	90%
Yorkshire BS	4.89%*	Fee-free	90%
HSBC	4.69%	£599	90%
Loughborough BS	4.99%	£99	95%
Hanley Economic BS	5.49%	£200	95%

*First-time buyers only

*If any of these deals appeal to you, you could speak for free to one of our mortgage brokers who could advise you on which one to go for. You can also compare thousands of mortgages with our online mortgage comparison tool.

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At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers) before acting on anything contained in this article.

We tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.