Mortgages Uncovered

As the fallout from the credit crunch continues, fixed rate mortgages have become very poor value, figures showed last week.

2 and 3 year fixed rates can cost almost £2K more than the cheapest discounted rate mortgage when the overall cost of a loan is taken into consideration, according to a statement made by Mform, the online mortgage broker.

Lenders have again and again increased mortgage rates over the past 12 months as the cost of securing funds on the money markets has risen higher and higher. This has now led to an unusual situation of fixed rate mortgages being nearly as high as standard variable rates, which are the rates that lenders normally charge when borrowers come to the end of a special deal fixed term.

Discounted variable rates have also increased, but Mform still say that they look better value.
HSBC has a 2 year discounted rate of 5.69%. On a £150K loan, the total cost over 2 years would be £25,414, assuming that interest rates do not change n that time. That is actually £1,882 less than £27,296 which a borrower with the same size mortgage would pay on the best 2yr fix rate, which is a 6.29% with NatWest or Royal Bank of Scotland, fixed for 25 mths, with a set up fee of £899.

The most competitive 3yr discount is from Woolwich, who charge 5.89% with no arrangement fees. On a £150K mortgage, the cost equates to £38,345 over 3 years.

The most competitive fixed rate over 3 years with Halifax, fixed at 4.49% over 13mths, then reverting to 7%. It has arrangement fees of £999 and costs £39,821 over the 3 years.

A further benefit of discounts is that they will often have lower set up and exit fees. This gives borrowers the flexibility of switching to a fixed rate at very low cost if better deals become available.
HSBC’s 2yr discount has exit fees of 2% in the first 12 months and 1% in the second. The 3 year discount from Woolwich has an exit fee of only £275.

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