Date:12 December 2008 I Comments: 2 I Views:7,919

No-one can deny that upheaval in the banking sector and dramatic base rate cuts by the Bank of England suggest tough times ahead.

Thousands of workers face redundancy, a bleak outlook for Christmas and probably not a particularly happy New Year.

Rates have been cut in an attempt to stimulate a faltering economy but public confidence is out of the window and people are reported to be tightening the purse strings.

But there is opportunity for some to start taking advantage of very low mortgage rates.

The problem is these opportunities are only available to consumers considered to be ‘low risk’ to mortgage lenders.

So, if your mortgage is below 60% of the value of the property, you have a good credit rating and are in a good steady job or stable self employment there are some pretty good rates available.

Alliance & Leicester have a 2 year fixed mortgage available at just 3.99% but beware, the arrangement fee is 1% of the loan plus a valuation fee and legal fees.

A £100,000 loan would attract a fee of £1000, a £50,000 loan would be £500 but if the loan is £300,000, the fee will be £3000.

Compare this to a 4.19% 2 year fixed rate offer from Northern Rock with a £995 fee:

£303,969 (including the £3000 fee, £670 valuation & £299 legal fees) on a repayment basis at 3.99% gives a monthly payment of £1602.78

(The valuation fee is high because for this to be realistic the property must be worth over £500,000 so the loan-to-value is below 60%)

At 4.19% with a free valuation, free legal fees and a £995 lenders fee (giving a loan of £300,995) the repayments would be £1620.51. Which is £17.73 per month more.

Over the 2 years that equates to £17.73 x 24 = £425.52 saved in repayments by opting for the 3.99% product.

But, it’s cost £3,969 to get it compared to £995. A difference of £2974 just to save £452.52.

So the 3.99% offer may look attractive but it will actually have cost £2974 – £452.52 = £2548.48 more in total over the 2 years.

Now lets be more realistic. What if the mortgage was only £150,000?

Using a property value of £250,000 the valuation fee for the 3.99% Alliance & Leicester product would be £340, the legal fees approximately £299 and the 1% arrangement fee is £1500 giving a total of £2139. The monthly repayment would be £802.21

The same scenario for the 4.19% Northern Rock offer with just a £995 fee gives a monthly repayment of £812.93.

The difference in repayments is £10.72 x 24 = £257.28 over the two years.

£2139 – £995 = £1144 difference in upfront costs – £257.28 = £886.72 more expensive in total for the lower rate.

Once again, the Alliance & Leicester 3.99% 2 year fixed deal may look attractive if you’re just interested in the rate but after the 2 year fixed period it could still have cost hundreds if not thousands of pounds more.

Always factor in the fees!! – Or ask an expert!



Category: Mortgages


  1. Quite right – and fees are only going to become more important over the next year or so while interest rates are low. Tight tracker mortgages will be replaced by less generous ones with a spread of 2.5% or so (and anyone thinking they’ll be able to pay less than 0% is dreaming) but I suspect banks will also try to ramp up their margins through fatter fees. It’s all part of recapitalizing the banking system, every mortgage holder must do his bit! ;-)

  2. The fees and costs are getting stupid, so much so that this time around I have gone for a lifetime tracker (just secured before the rates plummeted…) now I won’t have to fork out a grand every two years for someone to have the privilege of selling me a mortgage. Currently paying about 0.7% over base with 11 years to go – payments have gone down so much I am now overpaying to bring the balance down…