This is the perfect example of why you need to look beyond the headline rate when comparing mortgage deals as fees will affect the total cost of the product. You may find it actually works out cheaper to pay a higher rate if the arrangement fee is lower.
This basically depends on the size of your mortgage, but it also depends on whether the set-up cost comprises of a flat-fee or a percentage fee.
Why the fee matters
With flat-fees, the larger the loan the less of an impact the fee has. For example, if you're borrowing £300,000 then a £2,000 arrangement fee represents a much smaller proportion of your mortgage than if you were borrowing £100,000. Therefore, it can often make sense for those needing a large mortgage to pay a high upfront fee in return for a lower headline rate, whereas those borrowing a smaller amount may be better off paying a higher rate if the fee is less.
However, the opposite is true of percentage-based fees. If you were borrowing £300,000 and there was a 2% fee, you'd pay £6,000 just to set the mortgage up, compared with £2,000 on a £100,000 loan.
Lenders therefore use arrangement fees to manipulate mortgage deals as they know many borrowers will be led by the headline rate. Think about it - Halifax's new two-year fix has a headline rate of 2.99% but the 2.5% fee adds 1.25% to the cost of the loan each year of the fixed term, so you're effectively paying 4.24%.
Flat-fees are still the most common when it comes to standard residential mortgages, and deals which charge you a percentage of the loan size rarely offer the best value regardless of how much you're looking to borrow.
For example, someone taking out a £150,000 25-year repayment mortgage would pay £20,959 over the two year term if they opted for Halifax's fix at 2.99% and £3,750 of that would be the cost of the arrangement fee. However, if they opted for Leek United Building Society's two-year fix at 3.59% with a £799 fee, they'd pay £19,179 over the two-year term - £1,780 less.
Even on a loan of £50,000 (the minimum Halifax will lend on its 2.99% fix) the Leek product works out slightly cheaper - you'd repay a total of £6,925.72, compared with £6,986.48 on the Halifax deal.
More movement
However, while the Halifax mortgage perhaps isn't as competitive as you might initially think, its launch does signify an upturn in activity within the mortgage market. Since HSBC launched its two-year discount at 1.99% a fortnight ago (read more in our article 'Mortgage rates fall below 2%'), we've seen a number of other lenders launch new deals with lower rates. Given that the market has been pretty stagnant over the past year, this is positive news.
Woolwich, Barclays' mortgage arm, is another lender to have launched new lower rates today. Included is a one-year tracker at 1.98%, with a £999 arrangement fee. After the first 12 months, the rate will be 2.49% above the Bank of England base rate, giving a current pay rate of 2.99%.
You shouldn't view this product as a one-year deal, though, as an early redemption charge applies for the first three years so you'll be charged a fee if you redeem your loan within this time. Instead, look at it as a three-year tracker or even a lifetime deal - the 'go-to' rate of 2.99% compares very favourably with the best lifetime trackers. It's therefore worth considering if you are happy to go for a variable rate and won't need to remortgage in the next three years.
Both Woolwich's new one-year tracker and Halifax's 2.99% fix, along with many other low-rate deals, are only available to those with a deposit of at least 40%. If you need to borrow more than 60% of the property's value there are fewer products to choose from and you will pay a higher rate.
For more information on the leading mortgage deals, including products for those with a smaller deposit, read Laura Howard's article 'Interest rates stick; mortgage rates twist'.
Rate This Article
Click on a star to rate this article.
