Things to Watch When Chasing the Lowest Mortgage Rates
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Things to Watch When Chasing the Lowest Mortgage Rates

Clock  3 minute read

Carl Shave Carl Shave | May 25, 2017

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You might think that securing the most affordable mortgage is simply a case of finding the lowest headline rate, but unfortunately, life is rarely as simple as that. In many cases, if the interest rate looks too good to be true, it probably is. It is then down to you, the borrower, to identify where the additional costs lie. This warning comes following the launch of the UK’s lowest ever mortgage rate by the Yorkshire Building Society, which is offering a two-year mortgage with a 0.89 percent rate for those with a 35 percent deposit. You would think most borrowers would be biting the lender’s hand off, but there is a bigger picture to be looked at. The super-low mortgage rate is not a fixed-rate deal and does not track the Bank of England’s base rate. Instead, it is a discounted version of the Yorkshire Building Society’s base rate, which means it could rise or fall at any time.

So what is the real cost of the 0.89% mortgage?

It could be that the interest rate you pay does not rise from the advertised 0.89 percent over two years. However, as a discounted rate deal, the interest you pay is pegged at Yorkshire Building Society’s standard variable rate minus 3.85 percent.  After 2 years it will then rise to YBS’ variable rate, which is currently 4.74 percent. Although the discounted rate YBS mortgage does not track the Bank of England base rate, it is likely that if interest rates were to rise in the wider economy, the YBS variable rate would follow suit. The fact that the  Yorkshire Building Society’s standard variable rate can rise at any time, regardless of what happens in the wider economy, also leads to uncertainty about just how much you may have to pay.

Then there are the fees

When calculating the cost of a mortgage, it is essential borrowers factor in the cost of any mortgage arrangement fees. Despite the attractive headline rate, the YBS mortgage has a relatively hefty arrangement fee of £1,495. That leads to a total repayment of £558 per month for a £150,000 mortgage over a term of 25 years.  Once the fees have been taken into account this may not represent best value over other offers with higher rates but lower costs to arrange. When weighing up the total cost of a mortgage, as a general rule, the higher the mortgage amount, the more you would gain from going for a lower mortgage rate with a higher initial fee.

Now is a great time to find a cheap mortgage

So why are mortgage rates so low at the moment? Well, besides the record low Bank of England base rate of 0.25 percent, a mortgage price war is being fuelled by the tax clampdown on landlords. As the buy-to-let market becomes less attractive to landlords, banks and building societies are fighting to make up for the lost business by offering better deals elsewhere. The result is more attractive residential mortgage deals. Are you looking for a record low mortgage deal? Get in touch with us today to see how we can help you.