I wasn’t going to write this as its after 8pm on a Friday and I really should pack up for the day but as I went to shut down I went to close the website I was researching and thought, what the hell.
Over the last few months, fixed mortgage rates have been gradually creeping down and now deals are available from around 3% with plenty of other offers between 3% and 4%.
Sounds good but all of the best rates on the market are for 2 year offers.
If you, like many others fear interest rates will rise in the future and favour the security of a long term fixed rate then things don’t look so good.
3 year deals start from 4% and go up to 5% and beyond and 4 & 5 year deals start from 4.9% and upwards with the majority of 5 year deals being above 5.4%
So why is there a 2% difference between 2 year deals and longer 4 or 5 year deals?
Well, for starters there’s the ‘swap rates’ (the rate at which banks borrow money) see here:
2 year money costs lenders 2% so they mark it up by 1% for profit and sell it to mortgage customers.
5 year money costs just over 3% but most lenders are slapping on an extra 2% for themselves (and admin costs of course).
So, the longer you have your mortgage, the more profit the lenders will make from interest charged and the more it will cost the rate wary consumer.
Is that treating customers fairly?
So why is it like this?
My guess is it’s all about short term cash flow for banks.
If 10,000 mortgage customers have to remortgage every 2 years that’s £9,950,000 in lender arrangement fees (based on a fee of £995).
Nearly £10 million every 2 years.
And that’s just 10,000. There are a lot more than 10,000 mortgage customers in the UK!
In fact, a quick search online suggests over 14 million homeowners.
If only half of them have a mortgage and then half again chose a 2 year deal with a £995 fee that’s 3.5 million x £995 = £3,482,500,000
Nearly £4 billion every 2 years on lender arrangement fees alone.
That’s why I think 2 year deals are better.
Naturally it’s good for mortgage brokers and therefore the industry too but is it fair on the consumers?