by Peter Jacobs
Recent research shows that more people are opting for a fixed rate mortgage in these current troubled times than a year ago.With interest rates still at historic lows and more mortgage lenders than ever competing for new business the current crop of fixed rate mortgages have fallen to the lowest levels for many years. And this shows in the types of mortgages that people are currently taking out for their home moves and remortgaging.
During last month 26% of mortgages for borrowers were on fixed rate terms which is the highest it’s been for 7 months according to mortgage broker John Charcol. Yesterday we reported that 2 year fixed rate mortgages are the lowest for a massive 7 years and the same goes for 3 and 5 year fixed rate products as well.
The average 5 year fixed rate interest rate is now just above 5.6% which is the lowest level in 12 months and the average 3 year mortgage stands at 4.16% which is the lowest level also in a year.
The most reductions have however come along in the 2 year fixed rate market and there are rates as low as 2.79% if you have a 25% deposit but this has a massive product fee of £1,499 from the Yorkshire Building Society. There are many other offers around if you have a large deposit and your loan to value percentage LTV is low also. For those with small deposits there are still deals around but the product fees and interest rates are much higher.
First time buyers still in hiding
This shows in the latest statistics for last month where just 6% of mortgages went to first time buyers. The only trouble with taking out a 2 year fixed rate now is that interest rates are likely to be much higher than the current 0.5% Bank of England base rate in 2012 and the increase may be a shock to some. But if you are willing to play the game then short term lock ins may be for you (but if you are comparing a current 2 year fixed rate versus a five year fixed rate, when performing your calculations to see how much it’s likely to cost you take into account your product fee).
2 year fixed versus 5 year fixed – calculated example
For example, for someone with a 15% deposit the Yorkshire Building Society offers a 2 year fixed rate at 4.15% with a product fee of £1,495 and the Post office offers a five year fixed at 5.45% with a product fee of £999
If you have a £150,000 mortgage and kept taking out 2 year fixed rate deals over a 5 year period you would have to take out 3 mortgages (today, 2 years time and 4 years time) the product fees alone would add up to £4,485 and the total interest without repaying would be £31,125 giving a total cost of £35,610
If you took out the five year mortgage the interest would be £40,875 and with the product fee of £999 for the term the total cost is £41,875 meaning this would be £6,264 higher by taking this product all at face value
But what if interest rates rise over the next 5 years ? what if the base rate is just 1% higher in 2 years time ? You would have to take out a 2 year product at 5.15% just slightly lower than the current 5 year product meaning the savings get closer to zero.
When choosing a mortgage today it’s worth considering if you are going to move. Taking a 5 year product may mean you get early redemption penalties even if you are moving house and “taking the mortgage with you” so it’s always best to seek professional advice and get a product that is suitable to your circumstances.
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