Cheap loan rates... with a catch

By Simon Lambert
Updated: 11:29 EST, 22 January 2007

 

Two of the country's biggest High Street lenders have launched major advertising pushes for fixed rate home loans starting at a rock bottom 1.99%.

Halifax bank

Both Halifax and Lloyds TSB are targeting aspiring homebuyers with mortgages that start off at a stunningly low rate for one year. The mortgage is then fixed for another four years - with early repayment lock-ins - at 5.99%.

Essentially, the deals are five-year fixed rate mortgages with bargain basement initial payments and should be compared against the other five-year products on offer.

Many five-year fixed rate mortgages have cheaper interest rates than their two-year counterparts. And a rush of borrowers hunting down the last remaining cheap two-year fixes following the recent rate rise to 5.25%, has seen lenders pull their best buys.

Katie Tucker, of mortgage broker John Charcol, says: 'Lenders were already increasing their fixed rates before the Bank Rate rise and when their existing funds ran out, their new deals are based on dearer funding costs and hence are less competitive.'

However, borrowers who opt for a five-year fixed rate loan should do so because of the security it offers, rather than because it is initially cheaper than a two-year offer, which may suit them better.

Lloyds TSB's low start mortgage comes with a £999 fee, while Halifax's similar stepped fixed rate comes with a £1,999 fee, both start at 1.99% and rise to 5.99% for the next four years.

The initial low rate means monthly payments on a £100,000 repayment mortgage over 25 years would start at £423 and rise to £644 after the first year.

Monthly payments on a £150,000 loan would start at £635 and rise to £966. While this would give struggling buyers a year of breathing space, they would then face a hefty hike in monthly outgoings after 12 months.

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One of the better rival five-year deals, which has had the bank rate rise priced in, is being offered by Portman Building Society, at 5.35%, with a £599 fee. This would give monthly payments of £605 on a £100,000 25-year repayment mortgage and £908 on a £150,000 loan.

The three loans cost much the same over five years. Including fees, Halifax's loan would cost a borrower £37,987 on a £100,000 mortgage and £55,987 on a £150,000 mortgage, while a Lloyds' loan would cost £36,987 and £54,987, respectively, owing to its lower fee. Portman's five-year fix would cost £36,899 on a £100,000 mortgage and £55,079 on a £150,000 mortgage.

Furthermore, experts have advised borrowers not to rush into fixed rates without considering a good discount or tracker first.

Cath Hearnden, of independent broker My Mortgage Direct, said: 'Borrowers who are stretched to the limit by the smallest rate rise may find opting for a fixed rate a necessity to avoid getting into real difficulties.

'But for the better off who can manage another 0.25% or 0.5% increase, sticking it out with a good discount or tracker could prove the sensible option in the longer term until more attractive fixed rate are back on the table.'

HOW MUCH WILL YOUR MORTGAGE COST?
Product Fee Monthly payments (£100K) Montly payments (£150K) Five year cost (£100K) Five year cost (£150K)
Source: www.thisismoney.co.uk, January 2007
Halifax 1.99% - 5.99% £1,999 £423 - £644 £635 - £966 £37,987 £55,987
Lloyds TSB 1.99% - 5.99% £999 £423 - £644 £635 - £966 £36,987 £54,987
Nationwide 5.38% £499 £606 £910 £36,859 £55,099
Portman 5.35% £599 £605 £908 £36,899 £55,079
Britannia 5.44% £499 £610 £916 £37,099 £55,459
Leeds 4.99% (may change) £595 £584 £876 £35,635 £53,155