Why a short-term mortgage fix may be costly

By JO THORNHILL
Updated:

Mortgage lending is picking up, but the deals that lenders are most eager to push tend to be the most expensive. The focus is on short-term fixed rates, typically running for two years or less, which charge borrowers the highest upfront fees.

Though short-term deals suit many borrowers who do not want to be locked into a rate long term, they can be an expensive option because the borrower has to remortgage more often, paying fees each time.

The average arrangement fee on a two-year fixed rate deal averages £1,000. It means it is not economical for borrowers with smaller mortgages, for example less than £100,000, to switch their mortgage that often.

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Buyer beware: Fees of up to £1,000 can slash the gains made from switching to a fixed-rate mortgage

According to Moneyfacts, the independent data compiler, in the past nine months while the Bank of England base rate has been at 0.5 per cent, the total number of mortgage products has risen from 1,209 to 1,624.

Most new deals are two-year fixed rates, with the average at 4.93 per cent. This compares with the average three-year fix at 5.6 per cent and the five-year fix at 6.15 per cent.

Richard Morea, mortgage expert at broker London & Country Mortgages in Bath, Somerset, says: 'Borrowers should take fees into account and look at the total cost of a deal. Short-term deals could be a false economy.'

If a borrower with a £50,000 repayment mortgage over 25 years took a low-cost two-year fix with Abbey at 3.69 per cent, the cost per year would be £3,595 with an arrangement fee of £1,059. The total over the two years would be £7,190

But if the same borrower opted for a three-year fix with First Direct at 4.39 per cent, the cost per year would be lower at £3,463 with an arrangement fee of only £495. Over the three years, the total would be £10,390. The borrower would also make longer-term savings by paying a new arrangement fee every three years rather than two.

Borrowers with small mortgages, for example those who are close to paying off their loan, can struggle to find good deals as some banks and building societies won't lend less than £25,000 because they can't make much money on smaller loans.

For this reason Morea recommends longer-term fixed rates, such as three and five years, or lifetime tracker deals if borrowers have the flexibility in their budget to cope when interest rates rise.

One of the best lifetime tracker deals is on offer from First Direct at 2.08 percentage points over the base rate. There is a £999 fee and the deal has no penalties if borrowers want to switch in future.

Karen Taylor, 45, from Northwich, Cheshire, and her partner Ian Ronson, 47, a manager for a manufacturing company, have just remortgaged to a five-year fix with Abbey.

Karen, who has two children, Sam, 14, and Lauren, 12, and Ian, who also has two children, Emma, 18, and Nicole 15, have a joint mortgage of £25,000 and plan to pay off the debt in full within the five years, avoiding the need to remortgage again.

The Abbey deal is fixed at 4.99 per cent and a cashback perk meant there was no arrangement fee.

'We could have got a cheaper fixed rate over two years,' says Karen, a service manager for a fork-lift truck company, 'but we didn't want the hassle and expense of remortgaging again, particularly as we only have a small mortgage.'

Going down: The latest fixed-rate price cuts


Last week saw more lenders taking a knife to fixed mortgage rates following a rate cut frenzy at the start of the month. On Friday, Nationwide Building Society cut fixed rates for purchases by up to 0.24 percentage points.

Halifax also cut some five-year fixed rates by up to 0.2 points. Recently, Abbey and Alliance & Leicester, part of Santander Bank, cut rates by up to 0.2 points and 0.25 points respectively. A&L is now offering a best-buy two-year fixed rate at 3.19 per cent, though there is a two per cent fee.

Michael White, chief executive at emailmortgages.co.uk, the online mortgage broker, says: 'Fixed rates have come down, but they've hardly been slashed. They needed to be lowered because they are not as competitive as equivalent tracker deals.

'If borrowers believe interest rates are set to stay low, then a two-year tracker at under four per cent looks a lot more attractive than a two-year fixed rate at more than five per cent.'

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