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Fixed-rate mortgages at less than 3% – what are the drawbacks?


By Ian Pollock
Personal finance reporter, BBC News

image captionChanging your mortgage will be more complicated than it used to be

A sudden price war has broken out among big mortgage lenders.

In the past week or so the RBS group (including NatWest), HSBC, Santander and the Nationwide, have cut their mortgage rates to below 3% for new, four or five-year, fixed-rate deals.

These are the cheapest long-term home loans ever offered to borrowers in the UK.

Their emergence has been prompted by the availability of cheaper funds for lenders to access, under the Bank of England’s new Funding for Lending scheme.

The mortgages are mainly for people with at least a 40% deposit to put down.

In most cases this applies to people who bought their homes quite a few years ago, and now find the value of their homes is much larger than their outstanding mortgage.

Should these people now think of switching to these cheaper deals?

Ray Boulger, John Charcol.

The biggest benefits from remortgaging will go to borrowers who are currently paying a high interest rate and have plenty of equity.

Around 70% of all mortgages are currently on a variable rate, with most of those on standard variable rates, which vary between 2.5% to 6.14%.

Borrowers on a cheap lifetime tracker or on the old standard variable rates (SVRs) of Nationwide, Cheltenham & Gloucester and Lloyds TSB, which are capped at 2% above bank rate for the whole mortgage term, are unlikely to be tempted even by the new five-year fixed rates now on offer at just under 3%.

However, such sharp cuts in the best fixed rates make remortgaging to a five-year fixed rate a sensible option for many others.

Most borrowers currently on a fixed rate which was initially for five years or less will find it is not worth paying the early repayment charge (ERC) to remortgage onto the current cheaper rates.

Even in the last year of the fixed rate most such deals have an early repayment charge of between 2% and 5%.

However, anyone who has a longer term fixed rate may find it very worthwhile to pay the ERC and switch to a new lower rate.

Simon Tyler, Tyler Mortgage Management.

For those who are considering a remortgage away from their current lender’s variable rate, or are coming to the end of a fixed or discounted rate, these certainly are attractive.

image captionThere may be some obstacles to switching, says Simon Tyler

If for instance you have a Northern Rock mortgage on their SVR of 4.79% then 2.95% fixed for five years is very tempting.

Added to this, for remortgages some of the lenders are offering deals with no valuation or legal fees (NatWest, Nationwide and Abbey for instance), so the decision seems easier still.

All is not simple however.

If you are remortgaging you may run into some barriers.

Your income may not be as robust as lenders now require, especially if it has deteriorated since you last took a mortgage.

Your opinion of the value of your home may not be shared by the valuer which could mean you do not have sufficient equity to qualify for a 70% or 60% loan.

Your current arrangements for repaying the loan may not be reflected by the new lender and this could make the whole deal less attractive than it seems from a cash-flow perspective.

For instance, a £100,000 loan at 4.79% on an interest-only basis will cost £399 per month but a £100,000 loan at 2.95% on a full repayment basis would cost £471pm.

Having a repayment mortgage may well be a more sensible long term solution.

But in a recession, where the cost of living is rising, many borrowers still take the understandable (but perhaps short-sighted) view that monthly disposable cash is the final decider in making financial decisions.

Mark Harris, SPF Private Clients.

Traditionally, borrowers pay a premium for the security of a fix but these cracking rates mean this is no longer the case in all instances.

A five-year fix is less flexible than a tracker as it locks borrowers in for a lengthy period, with a hefty penalty to pay if you wish to exit the mortgage early.

Another downside is that most lenders restrict over-payments to 10% of the mortgage per annum as opposed to unlimited over-payments on some lifetime trackers.

But for many borrowers this will be enough and worthwhile to achieve such a cheap rate.

Borrowers will need at least 40% equity to qualify for the best rates, such as NatWest’s 2.95% deal.

There is a hefty arrangement fee of £2,450 and you will have to pay a lender’s exit fee of up to £200.

But depending on the size of your mortgage and your lender’s SVR, it may be worth it.

If you have a relatively modest mortgage it might be worth paying a higher rate and a lower arrangement fee, such as Monmouthshire building society’s 3.99% deal with £195 fee, available up to 80% LTV.

Andrew Montlake, Coreco.

Whilst we all now believe rates will stay lower for longer, the flurry of products available at remarkable rates should be enough to entice those who have procrastinated on a variable rate to finally make a move.

image captionMany borrowers should find the new deals attractive, says Andrew Montlake

For some however, it may not be so simple and care should be taken to weigh up the pros and cons.

Some will find the mortgage market a very different place to when they first took out their existing mortgage.

Changes in lenders’ criteria, especially around income verification and interest- only loans for example, could cause problems.

Longer term fixes are also not suitable for everyone either.

Although many now allow you to pay down around 10% of your mortgage without penalty, and are portable should you wish to subsequently move, this still imposes certain limits on flexibility.

You also have to price in the costs involved as arrangement fees up to £2,495 can be charged, negating the benefit for those with smaller loans remaining.

Nevertheless, there will be whole swathes of borrowers with equity and a good income who would have no such problems.

Aaron Strutt, Trinity Financial.

The average borrower with one of the bigger banks and building societies has approximately 50% equity in their property, so there is huge scope for borrowers to remortgage to one of the new rates.

For borrowers sitting on a standard variable rate, there are large savings to make by switching to one of the leading long term fixes.

For example, if you have a £200,000 interest-only mortgage, those on the Halifax SVR at 3.99% could switch to the HSBC 2.99% five-year fix with a £1,499 fee.

Halifax SVR payments over five years on interest-only are £39,900 but on the HSBC 2.99% fix will be £31,399.

That is an £8,501 saving on this £200,000 mortgage.

One of the only potential difficulties when taking a long term fixed rate is the issue of portability.

If you decide to move home at any point through the mortgage and you want to take the mortgage rate with you, the whole application will be underwritten again.

This means if your financial circumstances change and you do not have sufficient income levels to support the application it may well be refused.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Links to external sites are for information only and do not constitute endorsement. Always obtain independent professional advice for your own particular situation.

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