Szu Ping Chan takes an in-depth look at the best mortgage deals on offer at the moment.
This article was first sent to Fools as part of our Afternoon email campaign.
Once upon a time in the land of interest rates, savers and borrowers alike would wait anxiously each month for a decision by the Bank of England that would impact thousands of savings and mortgage rates.
And, depending to which side of the fence you sat on, the words that came out of Mervyn's mouth would either mean good news or bad for your money.
However, despite a 1.25% cut in the Bank of England base rate during the past year, there has been little change in terms of the interest rates you and I can get - especially when it comes to finding a better deal on your mortgage.
In fact, according to Moneyfacts, rates for tracker mortgages have remained stagnant since last year. Last October, average tracker rates stood at 6.23%. Today they stand at 6.27%.
In addition, it may surprise you to learn that building societies are actually the worst offenders when it comes to passing on the latest 0.5% base rate cut. Moneyfacts states that of the 17 building societies which have announced changes, 15 have cut their standard variable rates (SVRs) by less than 0.5%, with only Britannia BS and Melton Mowbray BS passing it on in full.
So where can you look for the best mortgages? Here are the top five deals available for a borrower with a 10% deposit, who needs a £180,000 mortgage.
Lender | Rate | APR | True cost over 24 months | Charges (including early repayment charges - ERCs) |
|---|---|---|---|---|
Britannia BS | 6.3% SVR | 6.5% | £29.281.28 | £300 valuation fee, £100 admin fee, £250 legal fees. £35 ERC deeds fee. |
Britannia BS | 6.04% fixed for 3 years | 6.5% | £29,388.60 | £200 valuation fee, £999 product fee, £250 legal fees. ERC of up to 3% to end of promotional period |
Ecology BS | 6.45% SVR | 6.5% | £29,744.24 | £210 valuation fee, £250 product fee, £250 legal fees. ERC of three months mortgage interest if repaid within 1st four years. |
Britannia BS | 6.14% fixed for two years | 6.6% | £29,753.80 | £300 valuation fee, £999 product fee, £250 legal fees. ERC of up to 2% to end of promotional period. |
Cheltenham and Gloucester | 6.5% SVR | 6.7% | £29,867.88 | £350 valuation fee, £99 product fee, £250 legal fees. No ERC. |
Source: eMoneyfacts
The first thing worth mentioning is that three of the top five deals above apply lender's SVRs from the outset of the deal.
This may surprise you, as SVRs are traditionally seen as the poor value rates set by lenders that you should avoid at all costs. However, as more of them seek new ways to rake in cash from customers, higher fees are sometimes outweighing the benefits of taking a lower initial rate, especially for those needing to borrow less.
Another benefit of signing up to a deal which applies the SVR from the outset is you can often switch deals without being slapped with hefty early repayment charges (ERCs). And at the moment, with interest rates predicted to fall sharply, a variable rate like the SVR might be a good option.
You are, however, at the full mercy of the lender in terms of the rate you pay each month, as the SVR can be changed as and when the lender likes. And with many failing to pass on the most recent rate cut, today's top SVR deals may not always be so competitive in the future.
However, if you're looking for an SVR with a twist, it's worth pointing out that Ecology building society also offers discounts of up to 1.25% off its SVR if you take steps to make your home energy efficient.
Ethical financial products are traditionally seen as the nice but pricey way of helping the environment. But with deals like this designed to keep both your wallet and conscience happy, perhaps it couldn't be a better time to go green.
Bigger deposits get better deals
So, what if you've managed to save a bigger deposit? Here's the situation for a borrower who's managed to save a 25% deposit and needs a £150,000 mortgage.
Lender | Rate | APR | True cost over 24 months | Charges (including early repayment charges - ERCs) |
|---|---|---|---|---|
Lloyds TSB Scotland | 4.99% fixed to 28/02/2011 | 6.6% | £24,873.24 | £3,849 product fee, ERC of 3% before March 2010, 2% to end of promotional period. |
Lloyds TSB Scotland | 4.99% variable to 31/01/2011 | 6.6% | £24,873.24 | £3849 product fee. ERC of up to 3% to end of promotional period |
Cheltenham and Gloucester | 4.99% variable to 31/01/2011 | 6.7% | £24,973.24 | £3849 product fee ERC of up to 3% to end of promotional period |
Cheltenham and Gloucester | 4.99% fixed to 28/02/2011 | 6.7% | £24,973.24 | £3849 product fee ERC of up to 3% to end of promotional period |
Leeds BS | 5.25% fixed to 30/11/2010 | 7.5% | 27,157.24 | £335 valuation fee, £4,500 product fee, £500 legal fees. ERC of up to 3% to end of promotional period |
Source: eMoneyfacts
There are two things to mention here. Firstly, rewards for those who are prudent enough to save a larger deposit can be pretty handsome. With banks tightening their lending belts even further, a larger deposit is more important than ever to guarantee the most competitive rates.
Secondly, the data in table highlights the importance of finding the best rate within your personal criteria. Within the deals above you could save more than £2,000 in the first two years alone by picking the best deal.
Of course, the best deal for you will depend on your individual circumstances. This is why you should consider using a broker, such as our very own Motley Fool Mortgage Service, which will take you through the best options available according to your situation.
There are also many lenders yet to announce their intentions over interest rates, as they wait for the next Monetary Policy Committee meeting next Thursday, when rates could be cut even further.
For now, it may be a long road to credit crunch recovery, and we may never get back to the easy lending of yesteryear. But whether you're a first time buyer or looking to remortgage, ensure you do your research, and no matter which deal you choose, you should be well on your way to some sort of `happily ever after'.
Tracker vs fixed rates
Traditionally, when interest rates are predicted to fall, it makes sense to go for a tracker mortgage, which follows the Bank of England base rate, and moves up or down according to changes in interest rates.
However, keep an eye out for fixed rates, which become more competitive as lenders seek to keep them attractive to mortgage borrowers.
Fixed rate deals also give you the extra peace of mind that your payments won't suddenly shoot up, as your monthly repayments will remain the same throughout the deal.