Experts say ‘go long’ on mortgages

Higher interest rates and spiralling arrangement fees are wiping out the benefits of regularly switching discounted and fixed rate mortgages every couple of years, leading to many experts declaring that taking the long term view is far more preferable.

Until now fixed rate and discounted mortgage products have offered rates usually one per cent below the standard variable rate, making them attractive to borrowers. Once the discounted period of the mortgage expired it was cheaper in the long run to take out another two or three year fixed rate or discounted mortgage product than stick with a SVR mortgage. But, now the rates of the discounted products have increased and the arrangement fees have shot up well past the rate of inflation, making them more expensive in the long run.

Financial institutions were initially happy to promote the discounted products as loss leaders that wouldn’t start to make profits for them until they reverted to SVR after two or three years. But, as more borrowers became savvy to the fact they could switch mortgages at the end of the promotional period with no penalty, banks and building societies gradually increased their arrangement fees in order, they say, to cover their costs.

The increase in arrangement fees was already making cheaper, promotional mortgages more expensive, but the global credit crunch has also had a significant impact as financial institutions have to pay more to borrow the money they lend as mortgages, meaning that now longer-term deals would be best for many borrowers. According to price-comparison site Moneyfacts, arrangement fees for new loans have doubled in the past two years; from an average £411 in 2005 to £827 this year but arrangement fees of £1,500 to £2,000 are not uncommon. In some cases paying the high fees can be worth it, particularly for those with larger mortgages, but only on products with competitive rates.

Because of the fee increases and interest rate rises, astute mortgage brokers have calculated that some of the best five-year deals on offer are now cheaper than the worst of the two-year deals. Even lifetime trackers are only marginally more expensive than short-term products, due to banks and building societies protecting their profit margins by cutting the short-term discounts on offer.

In a market that has over 3,000 different products on offer, brokers and industry expects are advising any would-be mortgage switchers to weigh up the overall cost of the product over its lifetime and factor-in items such as arrangements fees, especially if they are added to the mortgage, before committing to a new deal. Even though the headline rate of a longer-term product looks more expensive, a longer –term mortgage would actually work out cheaper in the long-term.

Article Source: http://www.theukarticledirectory.co.uk