12th September 2013
Homeowners who have a large amount of equity in their properties are in an enviable position right now writes Jill Insley.
Mortgage rates for those who need a loan equivalent to 60% or less of their home’s value are at a new low. Mark Harris, chief executive of mortgage broker SPF Private Clients says: “While rates have fallen across the loan-to-value curve, the best deals are still available to those with the biggest deposits.
“These borrowers have the pick of the rates, which are at historic lows. Two-year fixes are available from 1.48% from West Bromwich building society or five-year fixes from 2.59% from Yorkshire building society.”
David Hollingworth of mortgage brokers London & Country says fixed rate deals are better value than variable rate loans. With positive economic data indicating that the Bank of England base rate might go up sooner than expected, now could be the time to secure mortgage payments for the next few years.
“Although rates are very low, markets are not really believing that they are going to stay low. There is some upwards pressure on swap rates (which influence the price of mortgages) which are now higher than they have been for the past two years,” he says.
Harris agrees: “More borrowers are opting for fixed rates which is no surprise when you consider just how cheap they are. However, while there is potential for further reductions the likelihood of rates rising is higher, so borrowers should consider moving now rather than waiting for already historically low rates to fall further still.”
Mark Carney, the recently-appointed Bank of England governor, has said that the base rate will not rise until unemployment drops to 7% – expected towards the end of 2016. But figures published yesterday show that unemployment has already fallen to 7.7%, leading some analysts to speculate that the base rate could rise sooner.
Mortgage borrowers have already anticipated this, according to Hollingworth, who says that more are opting for five year fixed rate loans than those lasting two years.
Two year deals
It is possible to get loans fixed at below 1.5% for two years, but the fees can be eye watering. “The cheapest rates do have hefty fees, so borrowers need to work out the total cost of the mortgage – rate plus fees – when comparing products,” says Harris.
“It might be better to opt for a slightly higher mortgage rate with a lower fee, depending on the size of your mortgage. For example, you might be able to fix for two-years at 1.99% from Norwich & Peterborough building society, with a loan to value ratio of up to 65% and a £295 fee.”
The West Bromwich mortgage mentioned above may seem fantastic value at 1.48% for two year with a loan to value ratio of 60% or less – but borrowers will incur a £99 booking fee and completion fee of £2,395. Worse still, the loans have a maximum limit of £250,000, making it is difficult for borrowers to benefit, says Hollingworth.
HSBC charges 1.49% for two years with a £1,999 fee – still high but at least the maximum loan level is £500,000. Yorkshire Building Society charges slightly more, setting its two year fixed rate at 1.66%. But the loan to value ratio is higher – 65% – the fees are lower at £975 and it has a maximum of £5m.
Five year deals
Two year fixed rate mortgages may be cheaper, but five year deals make more sense over the longer term, as the outlook is less certain. Tesco Bank is offering mortgages fixed for five years at 2.49% at a 60% loan to value ratio, with a £1,495 arrangement fee. This is still a hefty fee, but Hollingworth says that its
impact is less when spread over five years compared to two. He believes the Tesco mortgage is better value than its nearest competitior, a five year fix
at 2.79% from NatWest, even though the latter has a lower fee of £995.
Borrowers may also want to check out the comparative payments on the mortgage fixed at 2.84% for five years from Yorkshire building society – the loan to value ratio is up to 65% and the fee a relatively modest £475. However Harris warns: “The important thing is not to fix for longer than you are absolutely
sure about or you will have to pay a hefty early redemption charge to get out of the mortgage early. Seek independent mortgage advice if you are unsure.”