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Fixed Rate Mortgages: Check The Small Print

Mortgage owners will be bracing themselves for another rise in interest rates in the near future. However, while they’re hit by interest rate rises, they could be failing to spot the best deals thanks to the confusing small print.

Lenders can top up the revenue from fixed rate deals with arrangement fees, booking fees, valuations and extra months added to the term. Experts have warned consumers to look out for simple things like varying end dates for fixed rate deals, as many borrowers don’t realise that a two-year fixed rate deal may not end exactly two years after they took out the loan, but is more likely to end on a date stated in the mortgage terms, which may not be even as much as two years from the date they finally got the loan.

Two recent examples of apparently similar "two-year" fixed rates were from Alliance & Leicester and Bank of Scotland which end on 30 June 2009 and 31 October 2009 respectively – four months apart. It seems that borrowers look at the headline: “two-year” or “three-year” and the end year: 2009, 2010, but don’t concentrate as closely on the month.

If borrowers get ahead of the game and remortgage earlier than their due date on each occasion, then this is good planning, but over a twelve year period it may mean that the remortgage seven times instead of six and would have to foot the bill of an extra set of arrangement, valuation and possibly exit fees too.

The same applies to taking out two-year deals instead of three or five, with more fees being applied. Additionally, as lenders have increased these fees substantially in recent years this can prove very expensive. Some fees are as much as £1,500 now, which can add a huge amount to a smallish loan.

Halifax has a 5.79% two-year fixed rate deal with an arrangement fee of £1,499, but the 6.39% two-year deal ahs a fee of only £499. On a repayment loan of £100,000 the lower rate would have monthly repayments of £789, and the higher rate deal £835. The bottom line is that the low rate would save £888 in repayments, but cost an extra £1,000 in fees. Someone taking out a £125,000 mortgage would find it worthwhile, as the repayments over two years would save them £1,104.

Choosing the right mortgage is crucial with interest rates already at 5.5%, one percent more than a year ago, and they are almost certain to go to 6% this week. Lenders have already started to push up their mortgage rates in anticipation of further rises.

Mortgage experts are advising borrowers to fix their next rate as soon as possible before further rises come along – as they are widely expected to do.

There are problems beyond getting the best rate over the best period for the best arrangement fee. In addition there can be a wide variety in valuation fees – ranging from £195 charged by HSBC to Northern Rock who charge a whopping £555 for a standard valuation on a £200,000 property.

Tom Smith
17th July 2007

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