Much has been made in recent weeks of UK mortgage rates, which only ever seem to be going in one direction – down. A mere few days ago the Co-op launched a two-year fixed-rate deal with the lowest ever rate attached to it – a tempting 1.09%.
However experts are warning that some of the lowest deals available on the market today may not be as good as borrowers might think.
Why would a super-low interest rate not be a good thing?
It is worth remembering the interest rate is only part of the equation. Borrowers must also take into account the fees involved with individual mortgages. Typically speaking, a mortgage will have a fee attached when someone takes it out. They may also be charged a fee if they exit that mortgage at the end of the fixed period of time. Add to that the real possibility of paying another fee to get another mortgage and it is easy to see why a super-low interest rate may not always be as good as borrowers first think.
Be aware of the reversion rate
This is the rate that will kick into action at the end of the fixed period of time a mortgage deal will run for. It is usually significantly higher than the rate attached to the original deal. For example, the Co-op deal of 1.09% that has just hit the headlines reverts to 4.74% as soon as the deal ends.
Don’t focus on the interest rate alone
Clearly the moral of this story is simple – focusing on the interest rate alone can mean borrowers end up paying more for their mortgages than they think. This is the case with the Co-op deal, which has a fee of £1,499 attached. It has been calculated that several deals on the market with higher interest rates but smaller fees actually work out to be cheaper than this headlining rate from the Co-op. one such deal is one from Tesco Bank at 1.59% – half a percentage point higher than that from the Co-op.
It shows how careful borrowers should be to consider all the facts and figures before deciding which mortgage to go for. The 1.59% mortgage from Tesco Bank may well be half a percentage point higher than the one from the Co-op, but the difference in the fee amount is stark. While the Co-op deal has a £1,499 fee, the mortgage from Tesco Bank requires a fee of just £195. When this is taken into account the overall cost is much less.
It is understandable that some people will focus only on the percentage rates when comparing mortgages. However as this example shows, this could end up costing some borrowers more money than they had originally thought. Only by focusing on all the details of a particular mortgage offer can anyone find the best deal – the one that will cost them less money. And that is surely the end goal for us all.