A battle to get to the top of the best-buy tables has seen mortgage interest rates plummet, says Ruth Jackson. But don’t presume the option with the lowest interest rate is the cheapest deal.
A battle to get to the top of the best-buy tables has seen mortgage interest rates plummet in recent months, but don't presume the option with the lowest interest rate is the cheapest deal. Mortgage lenders are dropping their headline rates to entice customers, but using ever-increasing fees to make sure they are still making a profit.
The average fee on a fixed-rate mortgage is now £1,018, up from £986 last year, and the highest it has been since August 2013. So if you are shopping around for a new deal, don't just look at the interest rate; make sure you read the small print to see what fees are attached to the product. "Some of the lowest deals on the market have fees of around £2,000, and some borrowers are being asked for even more, with the largest fee on a fixed-rate mortgage sitting just shy of £4,000," says Charlotte Nelson of comparison site Moneyfacts.
Mortgage fees are usually added on to your debt instead of being charged up front, so they can have a huge effect on how much you repay over the course of your mortgage. Paying attention to mortgage fees could therefore save you thousands of pounds over the long run. Skipton Building Society is currently offering a two-year fee-free fixed rate mortgage at 1.48% (at 60% loan-to-value).
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
If you had a £150,000 mortgage, repayable over 25 years, you would be £1,088 better off in the first year by opting for Skipton's fee-free mortgage than if you went with the lowest rate on a two-year fix product, according to Nelson, as the best buy has a £1,495 fee.
However, it's worth noting that a high mortgage fee isn't always a bad thing. If you have a particularly large mortgage, it could work out cheaper for you to pay a big fee in order to enjoy a lower interest rate on your debt. For example, someone with a £500,000 mortgage would save £3,000 over three years by opting for a 1.1% mortgage with a £2,000 fee, compared with a 1.5% fee-free deal. You can compare the cost of mortgage deals, including fees, via the mortgage calculators at MoneySavingExpert.com. See the column on the right forsome of the better deals available for different circumstances.
The best deals
The best mortgage for you will depend on several different factors. Below, we look at which products suit a few different situations.
If you need to borrow more than £500,000, then you may well find it is worth paying Yorkshire Building Society's whopping fees around £2,500, depending on the value of your house in order to lock in a rate of 0.99% for two years.
If you aren't planning to move in the near future, you may want to consider going for a long-term fixed-rate deal. Not only will you get peace of mind on what you'll be paying, but you can also avoid paying fees every couple of years when you remortgage. First Direct offers a ten-year fixed-rate mortgage with a 2.49% interest rate and no fees.
Whether you are unsure about where you'll be living in two years' time, or you don't want to lock into an interest rate for too long, there are plenty of reasons you may only want a short-term fixed rate. If that's you, and you remortgage regularly, you'll want to keep your fees down to avoid adding too much to your debt. Skipton Building Society's two-year fix is fee-free, and at 1.48% it could well save you more money than the lower-interest, higher-fee options.
If you want to see if interest rates can go lower, or don't think they are going to go up in the near future, then you may want to take a look at a variable-rate mortgage. The best fee-free option is West Bromwich's two-year discounted variable at 1.39%. Alternatively, the lowest-rate is 0.89% from Yorkshire Building Society, but it has a £1,495 fee. The best option will depend on the size of your mortgage.
In the news this week
A review of tuition fees and student loans may be imminent after a "damning report" revealed that 75% of students will never fully repay their loans, which leave graduates with average debts of £50,000, say Sian Griffiths and Alastair McCall in The Sunday Times. An impending interest-rate rise on student loans to 6.1% might be reduced, signalled Jo Johnson, the universities minister, while Lord Adonis, the former Labour education minister and "architect" of tuition fees, said the £9,000 annual fees had become a "Frankenstein's monster" and should be "scrapped".
Other critics suggested withdrawing loans for degrees that "lead to low salaries" (a business degree from Oxford yields a median salary of £71,700 five years after graduation, while one from Wolverhampton yields £19,400). Another option being considered is raising the graduate salary cap, which is frozen at £21,000 until 2021, says Christopher Hope in The Daily Telegraph.
Middle-class borrowing is booming, according to the Bank of England consumer credit grew much more rapidly than wages in the year to April, rising by 10.3%, says Laura Whateley in The Times. As a result, more and more better-off borrowers are running into trouble. StepChange, the debt charity, reports helping 20,510 people earning between £30,000 and £40,000 in 2016, up from 17,972 in 2015.
Meanwhile, 7,327 people with incomes above £40,000 sought help, up from 6,963 in 2015. Average debts for the latter totalled £40,422. Many of those getting into financial trouble are in their 20s and 30s, according to RSM, the tax and consulting firm, which warns of a "repayment time bomb" among a generation that has known only low interest rates and cheap credit.
A free service to block cold calls and begging letters from charities received more than 1,300 separate requests on the day of its launch last week, says Lydia Green in the Financial Times. The Fundraising Preference Service was set up in response to public unease over the targeting of elderly and vulnerable people. Although you can't sign up for a blanket ban, you can specify the charities that you do not wish to be contacted by. To sign up, visit the website at FundraisingPreference.org.uk, or callon 0300-3033517.
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
Ruth Jackson-Kirby is a freelance personal finance journalist with 17 years’ experience, writing about everything from savings accounts and credit cards to pensions, property and pet insurance.
Ruth started her career at MoneyWeek after graduating with an MA from the University of St Andrews, and she continues to contribute regular articles to our personal finance section. After leaving MoneyWeek she went on to become deputy editor of Moneywise before becoming a freelance journalist.
Ruth writes regularly for national publications including The Sunday Times, The Times, The Mail on Sunday and Good Housekeeping, among many other titles both online and offline.
European stocks are back in business – can it last?
8 of the best properties for sale with communal gardens
