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Why a lower interest rate does not always mean the best mortgage

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Homeowners and buyers’ obsession with the lowest possible mortgage interest rates is leaving them susceptible to thousands of pounds in unexpected costs.

Most borrowers are focusing on enticing rates and overlooking fees and early repayment charges when selecting a mortgage, according to the latest research from Legal & General Mortgage Club.

Nearly two thirds of UK borrowers consider the interest rate to be the most important factor in choosing their next home loan, according to L&G.

Only 13 per cent of borrowers see early repayment charges as being important to consider when getting their next mortgage, according to research from L&G

Only 13 per cent of borrowers see early repayment charges as being important to consider when getting their next mortgage, according to research from L&G

But only 13 per cent of borrowers see early repayment charges as important, meaning they could face thousands of pounds in extra costs if they wish to move to a new product before their existing fixed deal ends.

A borrower locked into a five-year fixed rate deal on a £250,000 mortgage, who then decided to move or remortgage before the five years is up, could face £10,891 in early repayment charges according to L&G analysis.

‘Our latest research shows why it is important to look beyond the headline rate and consider other factors, like exit charges,’ says Kevin Roberts, director at L&G Mortgage Club.

‘Not doing so could mean having to pay thousands in unexpected costs when the time comes to move home or remortgage.’

Remortgaging prior to the initial fixed rate deal ending will usually result in an early repayment charge, which often ranges between one to five per cent of the outstanding mortgage amount.

Early repayment charges can be a serious issue for those looking to move home before their fixed rate deal comes to an end.

‘With Covid-19 changing the way we want to live and the stamp duty holiday offering a financial incentive, we’ve seen a huge increase in housing transactions over the last year,’ says Daniel Hegarty, chief executive of online mortgage company, Habito.

Early repayment charges often range between one to five per cent of the outstanding mortgage amount, and can be a serious issue for those wanting to move

Early repayment charges often range between one to five per cent of the outstanding mortgage amount, and can be a serious issue for those wanting to move

‘Unless timed perfectly with the end of their current mortgage’s fixed-rate deal, many of these buyers will have faced charges from their lenders to be released from their current mortgage early.

‘For some buyers, this will be a price worth paying to get their new dream home, but for others, it will have come as a nasty shock, or worse still completely sabotaged their plans to move.’

Lenders often allow borrowers to move their mortgage to another property without fees, in what is known as ‘porting’ – but this doesn’t work for everyone. 

It can be problematic for home movers who may require a new mortgage in order to fund the purchase, whether they be upsizers requiring a bigger loan or downsizers looking to pay off some of the outstanding balance.

There may also be an issue if a home mover’s circumstances have changed.

‘With porting, you generally do not have to pay early repayment charges,’ says Sykes. ‘However, you still have to satisfy your lender’s requirements at the time of the new application.

‘For example, if you have since become self-employed your current lender may not accept your new mortgage application.

‘If you can’t therefore port the mortgage, you have to pay the early repayment charges and remortgage with another lender.’

There are ways to avoid these charges and give yourself greater flexibility to change mortgage as and when you need, according to Sykes.

‘Fixed-rate deals may be most peoples preferred choice, but tracker and variable rates may suit some people better as these can often come with flexible features like no early repayment charges so people can make a partial repayment as and when they need,’ said Sykes.

But tracker and variable rates also come with added uncertainty over future interest rate changes.

There are some fixed-rate products out there with no exit fees, but borrowers will need to lock in for a long time. 

Habito’s new 10 to 40 year fixed rate mortgages, for example, enable borrowers to fix the interest for the lifetime of the mortgage with no exit fees, albeit at a higher rate of interest than the market average.

What else should borrowers consider?

On top of early repayment charges, borrowers should also consider the upfront fees that typically come alongside a mortgage deal.

There is often an arrangement fee which can either be paid upfront or added to the mortgage amount.

This may mean the cheapest overall mortgage deal is not necessarily the one with the lowest interest rate.

For example, borrowers looking to remortgage might be drawn in by TSB’s new two-year fixed deal currently offering a headline-grabbing 0.99 per cent interest rate.

But the mortgage, which is available to borrowers with at least 40 per cent equity built up within their homes, also comes with a hefty £1,495 product fee.

For a borrower with a mortgage of £120,000 on a 30-year term, it would cost £10,735 over the initial two-year fixed period with TSB.

Nationwide currently offer a two-year fixed deal with a 1.54 per cent interest, but with no fee and the offer of £500 cashback.

Although, the monthly payments would be higher, the total cost of a £120,000 mortgage over the two-year period would amount to £9,484 once the cashback had been included.

However, whether or not it is beneficial selecting a higher interest rate with a lower product fee will largely depend on how large the mortgage is.

‘Often the lower the interest rate, the higher the product fee so for someone borrowing £100,000, paying a high product fee for a better interest rate may be an expensive thing to do,’ says Sykes.

‘Whereas for someone borrowing £500,000, the higher fee may be worth it in order to secure the lower interest rate.’

Borrowers not only need to be wary of paying the higher fees, but also the frequency at which they will be required to pay them if they continue to choose shorter mortgage deals in a bid for the cheapest interest rate.

‘Lower-rate products are typically the shortest fixes on the market, but, keep in mind that you’ll pay these fees every time you remortgage,’ says Will Rhind, head of mortgage advice at Habito.

‘Most mortgages have fees of around £999, so if you chose a two-year fix every time, you’re also going to pay that fee potentially 14 times over a 30-year mortgage term, costing you around £14,000 in fees alone.

‘Comparing that fee cost to taking a 5-year, or a 10-year mortgage each time, then the rate might be higher, but you’ll pay fees just six or three times over the lifetime of the loan, not 14 times.’

On top of product fees, lenders sometimes offer financial incentives such as covering the cost of a borrower’s legal fees or the mortgage valuation.

‘Lower-rate products don’t tend to come with many freebies, whereas those with higher monthly interest rates can come with free house valuations, no legal fees, the promise of cashback, and more,’ says Rhind.

‘Sometimes it can be worth it, but other times not – so you need to watch out for both low and high-rate mortgages and compare their true cost with everything – freebies and fees – included.’

You can do this using This is Money’s mortgage calculator. 

Another key consideration when applying for a mortgage is whether you might want the option to overpay your mortgage each year.

Overpayments are extra payments made on top of the usual monthly mortgage commitments, which will enable borrowers to pay off their mortgage faster and save on overall interest.

The majority of fixed-rate mortgage deals allow borrowers to make overpayments amounting to 10 per cent of the total outstanding amount each year without incurring early repayment charges.

Some are more flexible, but others may be more restrictive, so borrowers should always check before making overpayments.

‘The best way to save money on your mortgage is to pay it down as quickly as possible,’ says Rhind.

‘If you’re in a job where you’re paid bonuses or you’re likely to have a financial windfall or come into any inheritance, it’s important to know how much you’re allowed to overpay on your mortgage before you get charged a fee.’

Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.

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Hotel Indigo debuts in Austria

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Hotel Indigo opened its first hotel in Austria, Hotel Indigo Vienna – Naschmarkt. Located a short walk from the city’s historic center, the hotel offers 158 guest rooms, a rooftop garden resembling an urban jungle, a restaurant, and a lobby bar.

 

Taking inspiration from a famed local architect, Otto Wagner, a key member of the Secessionist movement, guests will find touches of gold used throughout the fixtures in the bathrooms as well as intricate patterns, made famous by Otto, woven into the carpet design in the hallway, and the tiles behind reception. Otto’s love for gold, Art Nouveau design, and ornate patterns can also be seen at famous local buildings such as the Majolikahaus, a short walk from the hotel. From ground level, the building looks innocuous, but as guests look skywards, they will see the top floors are decorated with exquisitely sumptuous floral motifs in brightly colored porcelain and gold leaf, a hallmark of the new style.

 

Stefanie Augustin, General Manager, Hotel Indigo Vienna – Naschmarkt, commented: “We are pleased to open our doors and accept our first guests into the first Hotel Indigo in Austria. We sit in the heart of the surrounding neighbourhood and strive to make all the locals proud, by helping to bring a bit of that external story in so guests can truly experience what Vienna has to offer.”

 

 

 

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Tolent secures Newcastle resi project (GB)

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Tolent will put up 135 ‘ultra-modern’ system-build homes, with designs selected from an architectural competition. Sunderland’s new Vaux neighborhood, being built on the site of an old brewery, will eventually have 1,000 homes, according to the plans, as part of a drive to double the number of people living in the city centre. The homes will stand alongside The Beam and City Hall – the latest development to rise from the ground at Riverside Sunderland. Construction work on the scheme is expected to start within weeks, forming the first of the new distinct neighbourhoods that will create city centre housing for up to 2,500 residents.

 

The properties are based on the winning designs in the Homes of 2030 competition, which was launched in March 2020, and managed by the Royal Institute of British Architects, to encourage the design of environmentally-friendly homes that support people in leading independent, fulfilling lives as society ages.? Construction work on the development is due to start this summer and the first tranche of homes should be completed by the end of 2023.

 

Sunderland City Council leader Graeme Miller said: “We’re absolutely thrilled to have taken this final step to get work started on our flagship residential scheme at Riverside Sunderland. The housing developments on Riverside Sunderland will be world-class, and Tolent is an ideal partner to deliver them, based locally and capable of building these aspirational homes.”

 

Tolent chief executive Paul Webster said: “Vaux neighbourhood is an amazing project that showcases the strides being taken in Sunderland to modernise the city centre. The world-class houses being built will provide a community fit for the future and an archetype for sustainable housing. As a truly local business, we are proud to be involved in the project and to showcase our ability to meet and exceed the capabilities of national contractors on a local level. The project will complement a number of local landmarks that we have constructed including The Beam, Beacon of Light and Echo Building. We have been working closely with the entire team since being appointed preferred bidder back in September and we can’t wait to get started.”

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BlackRock acquires Dagenham urban logistics development (GB)

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A joint venture (JV) between Chancerygatea fund managed by Credit Suisse Asset Management, and Hines has forward sold a 172,000ft² urban logistics development in Dagenham to a fund managed by BlackRock for an undisclosed sum. Dagenham Council has approved plans to speculatively build 15 Grade A urban logistics and industrial units at the development which is called Zephyr Park. The units range from 5,490ft² to 34,670ft² and are available leasehold and freehold. Construction is due to commence in August this year. The six-acre site was previously owned by wholesale electrical distributor Rexel UKSituated on Rainham Road between the A12 and A13, Zephyr Park is located less than half a mile from Hackman Capital Partners and Dagenham Council’s proposed €348.5m (£300m) film and TV studios.

 

Chancerygate managing director, Richard Bains, said: “Zephyr Park will be an outstanding urban logistics development which will generate continued investment and job creation for Dagenham. Forward selling Zephyr Park to BlackRock shows the strength in urban logistics as an asset class. It is also a testament to the high specification, a sustainable product we build as it attracts businesses to locate to our developments ensuring they are best placed to continue to grow. We look forward to working with Hines and BlackRock to deliver Zephyr Park and expect to achieve practical completion in summer 2023.”

 

Greg Cooper, Hines managing director, industrial and logistics, added: “We are pleased to have executed this opportunity to recycle this asset, with the value generated illustrating the unabating demand for high-quality logistics developments. It is an asset class which remains a key focus for Hines in the UK, and we are continuing to explore opportunities to grow our portfolio of both big box and urban facilities.”

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