When 2.29 is less than 1.89. Really, it can be you know...

Posted on 7 February 2013 by Ray Boulger

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When 2.29 is less than 1.89. Really, it can be you know...

Tomorrow Chelsea B S is cutting its 1.99% 2 year fixed rate (end date 30/4/15) to 1.89%, but at the same time increasing the fee from £995 to £1,695; there will still be no freebies. This new, lower, rate will only be better value than its current 1.99% rate, which has a £995 fee, for people borrowing over £350,000 as on smaller loans the saving from the 0.1% cut in the interest rate will be more than wiped out by the £700 fee increase. The smaller the mortgage the more the lower rate will mean worse value.

At the same time its parent, Yorkshire B S, which currently also offers a 2 year fix at 1.99% with a £995 fee and no freebies, albeit with a shorter end date of 31/3/15, is adding a product to its 2 year fixed rate range. This has a cheaper rate of 1.94% but a higher fee of £1,495, again with no freebies and with the end date still 31/3/15. This new rate will only be better value for mortgages over £500,000, which is probably not a typical Yorkshire B S mortgage, but maybe Yorkshire B S is trying to increase its average loan size!!

Another Yorkshire B S Group society, Norwich & Peterborough, also offers a 1.99% 2 year fix with a fee of £995 and no freebies; this rate lasts for 2 years from completion.

The 30/4/15 end date for the Chelsea mortgage will allow most borrowers to have the rate for the whole two years but it is worth bearing in mind that the bigger the fee the more important the end date is on a short term deal, something often overlooked. The effective rate will increase a little if the end date is so tight that borrowers don’t get the benefit of the low rate for the whole two years. Of course if the end date is generous the effective rate will be slightly lower.

On Saturday ING Direct is reducing its 2 year fix up to 60% LTV from 2.44% to 2.29%. The fee on this deal is well below average at £495 and is not being increased. In addition on remortgages it offers a free valuation and free legal fees; on purchases there is a valuation fee refund. The end date is the same as Chelsea’s, 30/4/15, but a month longer than Yorkshire’s.

Taking an average mortgage size of £142,000, (based on the latest CML figures) the fee of £1,695 on the Chelsea 1.89% 2 year fix equates to 1.19% of the mortgage. Therefore assuming the rate applies for exactly 2 years the fee adds 0.6% to the rate, taking the effective rate up to 2.49%.

Using the same average mortgage size of £142,000 the ING Direct fee is equivalent to only 0.35% of the mortgage, or 0.17% p.a., thus taking the effective rate up to 2.46%, slightly cheaper than Chelsea’s effective rate, despite its headline rate being 0.4% higher. After allowing for the freebies with ING Direct (on remortgages a free valuation and free legal fees; on purchases a valuation fee refund) the differential in favour of the ING Direct product widens further.

It is a huge pity that ING Direct is being taken over by Barclays, thus taking a competitive lender out of the equation, with the resultant reduction in consumer choice. But that is the way of the world.

With the market offering such a wide range of fees and rates choosing the right deal, especially on 2 year fixes and trackers / discounts, will often make a significant difference to the overall value of different deals, with the size of the mortgage being the most critical factor when assessing this rate / fee trade off. However, choosing the right deal goes well beyond this.

The starting point will be fixed or variable and how long the initial deal should be for. But once this decision has been made other factors which a good independent mortgage adviser will reflect in a recommendation include the significant differences between lenders in their criteria and affordability calculation. What may appear to be the best mortgage is irrelevant if the applicant can’t meet the lender’s criteria!

Categories: Mortgages, Interest rates

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