Should you fix your mortgage at 1.99%?

The cost of fixing your mortgage for two years has fallen to an all time low and Leeds Building Society is offering the chance to fix your mortgage payments at en eye-wateringly low rate of just 1.99%.

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But before you rush to apply for this deal, read on, because while it might be the lowest fixed rate mortgage on the market, it isn’t necessarily the cheapest. 

Once you’ve decided what type of mortgage to go for (fixed or variable), most people base their decision on the rate of interest they’ll be charged and lenders know this.

This is why we’ve seen mortgage fees shoot up over recent years because banks and building societies are using set up costs as a way being able to offer attractive headline interest rates without it affecting profit margins. 

The average rate on two-year fixed mortgages has fallen from 4.01% to 3.82% since August, but the fee you have to pay to set up a mortgage has risen 6.4% since June from an average of £1, 178 to £1,253. 

Therefore when you’re looking for a mortgage it’s vital to calculate the total cost over the term of the deal and not be blinded by the headline rate. 

The lowest rate mortgage may not be the cheapest

Leeds Building Society’s new two year fix at 1.99% may appear to be amazing value but you’ll pay £1,999 in fees just to take the loan out (a £199 non-refundable booking fee and £1,800 completion fee). 

As a result, once you’ve crunched the numbers, it isn’t necessarily the best value option.

When you factor in the fee and work out the total cost of the mortgage over the two year fixed term, there’s a better option for anyone borrowing less than £221,400. 

Yorkshire Building Society has a two-year fix at 2.69% - on the face of it this appears far less attractive than the Leeds deal. However, the fee is just £95 which will actually make it a cheaper option for many people. 

Someone taking a £150,000 mortgage would pay £16, 734 over the two year fixed term on the Yorkshire, while the Leeds deal would cost them £17,347 - £613 more.

What’s more they’d have to stump an additional £1,904 upfront to take out the mortgage with Leeds (the fee can be added to the loan, but interest will be charged on it adding more to the total cost).

When is a big fee worth paying?

However, high fees can be worth paying. The bigger the mortgage, the less of an impact the fee has. On a £250,000 mortgage Leeds’ 1.99% fixed rate deal works out to be £247 cheaper than Yorkshire’s.

How do I work out the total cost?

Calculating the total cost of a mortgage product is quite straight forward.

You need to work out what your monthly repayments will be, which you can do using an online calculator.

You’ll be asked for three pieces of information:

Mortgage value - the amount you are looking to borrow eg. £150,000.

Mortgage rate - this is the interest rate you’ll pay initially eg. 1.99% in the case of the Leeds two-year fix we refer to above

Mortgage term – this mustn’t be confused with the deal term.

 You’re likely to be applying for a two or five-year fixed or variable rate product, however your monthly repayments will probably be based on a longer term.

Most people take their first mortgage out over 25 years and then the idea is that each time they remortgage this term will reduce term as some of the outstanding debt will have been paid off some of the outstanding debt.

It is this period of time your monthly repayments will be based on.

Once you know how much your monthly payments will be, you need to multiply the monthly payment by the number of months the mortgage deal lasts for – 24 in the case of a two-year fix, but check this as many products will have a set end date that could mean the exact deal term is slightly longer or shorter.

You then need to add on the fees to get the total cost of that mortgage product.If this all sounds too confusing another option is to speak to an independent mortgage broker.

MoneySupermarket’s mortgage advice service is provided by L&C Mortgages which offers fee-free independent advice.

You speak to an advisor by calling 0844 209 8725 and find details of more mortgage deals on our mortgage channel.

Please note: Any rates or deals mentioned in this article were available at the time of writing.

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