Darren Cook, head of mortgage research at moneyfacts.co.uk, commented: “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 per cent. 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 per cent with a reasonable fee of £399. Taking the average UK mortgage of £150,000, and basing our example on a repayment mortgage over 25 years, it is clear that low rate is not always best.
“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 Independent Financial Adviser (IFA) should be looking at this for you. 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.”
