Is the Cheapest Rate Really the Best Deal?
Posted on 22 May 2014 by
A leading industry figure commented recently that the popularity of two-year fixed rate mortgages is due to the fact that they fit in with consumers “personal planning horizons”.
However, I think that it’s a little more complicated than that. In my personal experience as a broker, I think the reason borrowers like two year fixed rate products is because they're the cheapest rate available, and we all like cheap. However in many cases borrowers are unaware of the alternatives, because the alternatives simply aren’t as visible - lenders, like supermarkets, need to have cheap looking deals in their windows to entice would be borrowers to come in.
The idea that borrowers like two year rates because they fit with their “personal planning time horizons" goes back to the days when credit was freely available to all. Back in the early noughties, you could continually choose whatever the cheapest rate was, secure in the knowledge that in two years time, you'd be able to choose from the cheapest available deals once again. So why would you need to look at longer terms?
However, the credit crunch has taught many people a valuable lesson, that two years is actually a very short time. We believe that people can plan further into the future these days, and this, along with the historically low rates, has created a far higher demand for longer term fixed rates than many of the High Street players think. I wonder how many borrowers with pre-school children, or more mature borrowers nearing the end of their mortgage term would like a seven or even ten year fixed rate, but simply cannot find one?
Now there’s also the Bank Of England bank rate to factor in as well. Everyone agrees that it will inevitably have to go up, and expert speculation is that more and more the prime time for the first increase is around the end of 2015 to early 2016, which coincidentally is when most of the current two year fixed rates have their end dates. So that very attractive, very cheap deal will be ending just as the bank rate begins to increase. So was the suggestion to go for a two year fix the “best advice” or just the “cheapest deal”?
The problem is that working out what is the best deal for you requires a great deal of research or, ideally, expert advice. How can you be sure of getting the best deal if you’re only approaching your bank? Most banks can only offer their own products, rather than searching the market to find the deal that suits YOU best. And who has time to visit all the High Street lenders? Of course Best Buy tables and comparison sites can be useful, but they will only tell you the cheapest rate - and this may not be the best deal for everyone. If you’re looking for a mortgage to protect you from rate rises in the next few years, a two year fixed rate, however cheap it may be now, will leave you trying to find a new mortgage in a very different market.
All of this shows how important it is to approach an experienced, independent mortgage broker like John Charcol. As well as taking care of all the paperwork and liaising between parties, we will work with your situation to find you the deal that’s right for you – and we have access to a much larger range of mortgages than your average High Street lender. If you need advice on finding and applying for your perfect mortgage, then please get in touch with one of the team on 0844 346 3672.
The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them.