The Post Office has launched a new lower two-year fixed rate mortgage at 2.85%. This one of the leading rates on the market, but is it ever the cheapest option? We take a look.
What's the deal?
Fixed for two years at a rate of 2.85%, this deal is available to both first-time buyers and existing homeowners who need to remortgage.
The maximum you can borrow with this deal is 65% of the property's value, meaning you will need a deposit of at least 35% in order to qualify. The maximum loan size is £250,000.
There is a £1,495 arrangement fee with this product, which can be added to the loan.
If you decide to move house during the fixed rate term, the Post Office will allow you to take this product with you, subject to its lending criteria being met, and if you want to make overpayments then you can do this also.
The Post Office will let you overpay by £500 or more as long as the amount you are reducing the mortgage by doesn't exceed 10% of the balance of the amount outstanding as at March 31 of the previous year.
Any catches?
Early repayment charges apply if you choose to redeem the mortgage during the two-year fixed period, which amount to 3% of the outstanding mortgage.
Once the fixed term finishes, the rate will revert to the Post Office's standard variable rate of 3.49% - this rate is made up of 2.99% plus the Bank of England Base Rate which is currently 0.50%. You will, however, be able to remortgage without penalty at this time.
Verdict
If you are looking to fix your mortgage for two years, this is one of the most competitive deals on the market. But it will never work out to be the best value option, regardless of the amount you want to borrow or the size of your deposit.
If you can stump up a deposit of 40% or more, ING Direct's two-year fix is cheaper. Not only is the rate lower at 2.79%, but it will also cost less to set the mortgage up. The arrangement fee on the ING deal is £945 (compared with £1,495 for the Post Office's two-year fix).
The Post Office has the lowest rate for those looking to borrow between 60% and 65% of the property's value (65% is the maximum you can borrow). However, even in this instance, it isn't the best value option if you want to fix your mortgage payments for two years. Yorkshire Building Society's deal at the slightly higher rate of 2.89% will actually work out cheaper.
The reason for this is that the Yorkshire product, which is available for loans up to 75%, has a lower arrangement fee than the Post Office at £995. Therefore when you work out the total amount you'd pay over the two-year term (factoring in the arrangement fee and monthly payments), Yorkshire's deal is always cheaper.
For large mortgages, it can sometimes be worth paying a higher fee in return for a lower rate, but this doesn't work in the case of the Post Office deal because the maximum you can borrow is capped at £250,000. Even on a loan of this size, Yorkshire's two-year fix will be £376 cheaper.
Top Tip
Don't be lured in by the headline rate. You also need to look at the arrangement fees and work out the total cost of the mortgage over the term. You could find that it actually works out cheaper to go for a deal with a slightly higher rate if the arrangement fee is lower.
If you are unsure how to work this out, an independent mortgage adviser will be able to help.
Please note: Any rates or deals mentioned in this article were available at the time of writing.
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