Money Insider: On a fixed-rate mortgage freedom comes at a price

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The Independent Online

Choosing the right mortgage is never a straightforward process. We all have different circumstances, so unfortunately it will never be a case of one type of home loan fits all.

Most of us who opt for a discounted or fixed-rate mortgage will naturally focus on the interest rate and fee as we look to keep the up-front costs and monthly repayments to a minimum.

However, research by HSBC shows it is equally important to check the costs of terminating your mortgage deal ahead of schedule – not something you are really contemplating when signing on the dotted line, but a very important factor, especially when you see the potential cost implications.

An early repayment charge (ERC) will be detailed in your mortgage agreement, and will tell you how much of a penalty you would have to pay to get out of your deal before you reach the agreed maturity date.

If you look at the five-year, fixed-rate products available, many lenders will charge 5 per cent of your mortgage balance to exit the deal in the first year, but in reality this is something you are unlikely to want to do.

The situation is different when you get to the last 18 months or so of your mortgage, as you’ll be taking more notice of prevailing interest rates and starting to consider your options for when your current deal finishes.

This is where the difference in ERC charges is important. In the final year of a five-year fixed deal, some lenders, such as HSBC, Co-operative Bank and Britannia, will charge only 1 per cent of your balance as a get-out fee. Northern Rock, meanwhile, charges 4 per cent and Santander, the Post Office and Nationwide are among those still requiring a hefty 5 per cent.

To give you an idea of the cost differential, someone with a £160,000 mortgage having to stump up a 5 per cent exit penalty would be faced with a bill of £8,000, compared with a far more palatable £1,600 payable to a lender charging just 1 per cent.

For those with a smaller loan, the costs will not be as great, but the potential savings through moving|to a lower rate will be smaller too, so the size of the ERC is still a rather important factor.

It is understandable that lenders will impose a high ERC at the start of a fixed-rate mortgage, but to impose such steep fees in the final year is excessive and makes it highly unlikely that you would be financially better off switching to a new deal, even if it was at a considerably lower rate.

At the moment there will be people getting itchy feet as they see some of the very competitive five-year deals on the market, some now even below 4 per cent. They may wish that they could move, but feel restricted by the high get-out costs of their mortgage.

So next time you’re in the market for a new fixed or discounted mortgage, don’t be swayed purely by the headline rate and the product fee if there’s a sizeable exit fee payable in the final year or so of the deal. It may be worth paying slightly more each month just to buy yourself some additional flexibility further down the line.

Paying only interest is restricted

The financial Services Authority is cracking down on interest-only mortgages. It was no |surprise, therefore, |when Coventry Building Society this week became the latest lender to amend its policy on interest-only deals: it |will no longer offer these loans to first-time buyers.

It is also restricting interest-only to loans for other borrowers to a maximum loan-to-value (LTV) of 75 per cent, and will cap the maximum interest-only option mortgage at £500,000.

Other lenders have made similar changes. Northern Rock no longer accepts certain repayment vehicles and has cut its maximum LTV from 85 per cent to 75 |per cent. Lloyds Banking Group no longer offers interest-only repayments to people borrowing more than £500,000.

Meanwhile the Royal Institution of Chartered Surveyors reports the first fall in house prices since July 2009.

There is no shortage of best buys for borrowers to consider. Among the pick is a 3.64 per cent fixed-rate for two years (£995 fee) and up to 85 per cent LTV for existing customers of Norwich and Peterborough BS. Yorkshire BS has a 3.65 per cent fixed for three years, with up to 75 per cent LTV and a £995 fee.

Andrew Hagger is a money analyst at Moneynet.co.uk

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