Mortgages: don’t be dazzled by super-low rates of interest | Mortgage charges
Mortgage rates have made headlines for the past few weeks. It started with the first sub-1% deal in several years and continued with lenders launching their cheapest home loans ever. Since last week it has been possible to tie for two years at only 0.94% or for five years at only 1.06%.
“A number of providers have introduced flashy interest rates below 1% in the last few weeks to attract new borrowers,” says Eleanor Williams of financial data provider Moneyfacts. “This suggests that mortgage providers are ready to lend and reflects the ability to keep the price down while we stay in a low-interest environment.”
David Hollingworth of L&C, the mortgage broker, says it’s “really amazing to talk about five-year fixed rates of just over 1%”.
The range of mortgage offers on offer is often more staggering than the number of properties for sale. Photo: Hannah McKay / EPA
These best buy prices are available to those who deposit at least 40%, but there have also been a number of price cuts at the other end of the market.
Typically, the mortgages with the lowest interest rates have fees associated with them. Hollingworth says the market-leading 0.94% deals from HSBC and TSB have fees no higher than previous higher-rate mortgages. HSBC, which offers its businesses to buyers and rescheduling recipients, charges a fee of £ 999, while TSB, which offers its loan only to Remortgagors, charges £ 995.
However, at HSBC’s five year fixed rate of 1.04% – available only to Premier account customers – the fee is £ 1,499.
Fees should be considered when deciding on a deal, and “borrowers shouldn’t let the temptingly low interest rate put them off,” says Williams. “It’s important to compare the different options and make sure they take into account the true total cost of a new mortgage deal.”
Hollingworth cracked the numbers for Guardian Money, comparing HBSC’s 0.94% deal to one it is offering, which is set at 1.14% for two years and has no fees. He looked at the cost of a 25-year mortgage over the first two years and found that it was worth paying the fee on loans of £ 458,000 and more. Below that, the total amount paid was lower at the higher rate.
He notes that “the real thing is that a lot of people are adding the fee to the loan, which means they feel less about it,” but when that happens there is interest that is paid back over many years.
To check this, you can use an online mortgage calculator to find the monthly payments at the starting interest rate, then add them up for the fixed period and then add a fee.
The mortgage war is coming to a head and more solid deals are now below 1%. Photo: Bloomberg / Bloomberg via Getty Images
Applying for the lowest interest rate may seem like a great way to pass a lender’s affordability tests, but that’s unlikely. Instead of checking that you can afford the monthly cost of the starting rate, most do the calculations at a much higher rate.
“If you take five years or more of the term, some lenders use the salary rate to calculate it, but most have an affordable amount,” says Hollingworth.
“The fact that you pay 0.94% does not affect the amount of the loan because after two years you have to switch to the standard variable interest rate so that you can consider an interest rate above it.”
Mortgage lending has hit record highs, largely due to the mass effort to beat the holiday deadline for stamp duty. Photo: VictorHuang / Getty Images
For first-time buyers, the good news is that after a year of full and then limited availability of small deposit stores, the government’s 95% mortgage guarantee system appears to have kicked the market.
Hina Bhudia, Partner at Knight Frank Finance, says: “With higher LTVs, a price war is looming [loan-to-values], this is fantastic news for buyers with a down payment of 15% of the value of a home or less. “
She has seen “a lot of movement in rates” and says that most of the big-name lenders recently announced mortgage cuts for small deposit buyers.
Hollingworth says current Best Buy offers for those with a 5% deposit include a Coventry Building Society two-year fixed rate 3.25% with a £ 999 fee and a five-year Leeds Building Society 3.6% contract with a fee of £ 499.
“When they started at 95% a few weeks ago, rates were just under 4% – so the growth in the number of lenders in the market and their desire to do more business helped bring those rates down. ”
With 95% and 90% LTV, rates are usually still higher than they were two years ago, but Bhudia expects things to keep improving. “The lower end of the chain will move the market so I think the high LTV mortgages will continue to fall,” she says.
Hollingworth says that with the lower LTVs, he expects competition to keep rates low, but “I can’t see them getting much lower. Maybe there is a splinter here and there if they can.
“Therefore, the activity could be around the high LTVs, as there is a little more leeway there.”
Bhudia expects the market to remain competitive. “If HSBC is busy and pulling their rate, someone else will come – Santander is right behind with 1%. There’s no reason lenders will raise rates until we get re-banned and they can keep up with customer service.
Cashback is making a comeback
Cashback offers are often aimed at first-time buyers with a lack of funds. Photo: Clynt Garnham Business / Alamy
With increasing competition in the mortgage market, more and more lenders are trying to seduce borrowers with the “carrot” of a cashback payment.
Financial data provider Moneyfacts told us this week that the number of fixed income mortgage products with cashback has increased more than 70% in one year – from 735 in July 2020 to 1,263 this month.
According to Moneyfacts, the average cashback payment is currently £ 383 – up from £ 355 a year ago.
The highest amount currently on offer is £ 1,500 courtesy of Danske Bank in Northern Ireland, while Santander recently added £ 1,000 cashback to some of its first-time mortgages.
Such deals are often aimed at first-time buyers with a lack of funds. However, experts say it’s important not to be too influenced by freebies. The interest rates on mortgages with cashback are usually slightly higher than those on mortgages without. So if you’re tempted, you’ll have to do the math.
Much depends on how much you borrow. In general, cashback deals make more financial sense with small mortgages. However, a decent cashback payment can ease cash flow in what is often a challenging time.
Lenders offering £ 1,000 include Virgin Money, the Yorkshire Building Society’s Accord Mortgages Arm, Platform (part of the Co-operative Bank) and Kensington Mortgages.
“This is a far cry from pre-financial cashback deals that could hit tens of thousands of pounds, but it looks like a growing trend,” said Nick Morrey, product technical manager at mortgage broker John Charcol.
More and more lenders are now offering cashback on mortgages. Photo: AP
Santander’s first-time buyer deals with £ 1,000 cashback include two that allow people to borrow up to 95% of the property’s value: a two-year fixing of 3.78% and a five-year fixing of 3.93%. There is no product fee for either, although the maximum loan is £ 570,000.
Here is an example of how the math can work, based on the current two-year fixed rate at 75% loan-to-value (LTV). Regarding these offers, Virgin Money is offering the lowest price associated with £ 1,000 cashback: 1.28%. However, the lowest 2 year fix at 75% LTV is a 1.07% deal from Platform that comes with £ 250 cashback.
The difference is £ 750 cashback and 0.21% interest. For a two year mortgage of £ 200,000, paying 1.28% instead of 1.07% would mean an additional £ 456 in repayments. That means you’ll be ahead financially if you accept Virgin’s 1.28% deal with £ 1,000 cashback. But if it was a £ 500,000 mortgage, you’d be spending an additional £ 1,152. In that case, you would be better off financially with the platform’s lower interest rate and lower cashback payout.
Because of this, some people may think that it is a good idea to use a broker who will look at a borrower’s individual circumstances and calculate the numbers. “By and large, you have to look at the proposed monthly payment, multiply it by the number of months the deal is in place, add all fees, and subtract any cashback,” he adds.
* All prices correct at the time of writing