Hidden costs lurk behind appealing headline rates

Published 09th Feb 2009

Mortgage rates have been falling over the past few weeks but many of the cheapest deals now come with some expensive hidden catches.

"There is a big danger at the moment of being seduced by headline rates, but the lower the rate the bigger this catch will be," said Louise Cuming, head of mortgages at Moneysupermarket.com.

Alliance & Leicester, for example, is offering a two-year fixed-rate mortgage at 3.19% for borrowers with a 40% deposit. But applicants need to stump up an administration fee of 2% of the amount borrowed. When you factor in this, the deal may not look so attractive.

"For example, to borrow £100,000 at 3.19% on the Alliance & Leicester deal will cost £6,380 in interest over two years," said Cuming. "But add in the 2% fee (£2,000) and the total interest repayment over the term is actually £8,380. This means the borrower is paying £4,190 each year, which equates to 4.19% - a full 1% over the headline rate advertised."

If the fee looks reasonable and the rate is still low, borrowers need to look out for other hitches, such as being tied to a linked current account with the bank.

The Halifax has a two-year fix at 2.99%, which comes with a 2.5% fee and the need for a 40% deposit. Borrowers must also have a current account with the bank, funded by their salary. The Royal Bank of Scotland offers a two-year, 3.44% fix at a relatively generous 75% loan to value and £559 product fee - but borrowers need to sign up to its Royalties Gold account.

"Having access to the details of a borrower's current account gives a lender comfort," said Ray Boulger, technical manager at mortgage broker John Charcol.

Packaged accounts involve a monthly cost too - Royalties Gold is £12.95 a month - which should be factored into any "saving" on a mortgage rate.

And borrowers may not qualify for some linked accounts. HSBC has a two-year discount mortgage at 2.99% - 0.95% below the bank's standard variable rate of 3.94%. However, only HSBC Premier customers can get it. This means having £50,000 in savings or investments or a minimum salary of £75,000 and a mortgage of £250,000.

"The deal is for customers who pose the least credit risk," said HSBC spokesman James Thorpe.

Borrowers are also being forced to tie themselves to lenders for a long time after the initial rate has expired.

Woolwich, for example, is advertising its "lowest-ever fixed-rate mortgage" priced at 2.29%, in exchange for a 40% deposit and £995 arrangement fee.

But after the first year, the borrower is tied in for a further two - paying base rate plus 2.29%.

It will cost 2% of the loan in early repayment charges to leave at any time during the three year tie-in.

But a spokeswoman for Woolwich, Liz Holloway, said there is a "drop and lock" facility attached to the mortgage.

"This means that if the Woolwich offers a cheaper deal during the extended tie-in, borrowers can switch to it without paying the early redemption charge," she said. However, they will need to pay any administration fee that is attached to the new deal.

Small building societies, such as Cambridge, Newbury and Shepshed, also have special mortgage deals but they are only available for borrowers living within their heartlands.

Source: ' Observer '

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