Mortgage borrowing still cheap but rates and fees are rising
While mortgage rates are still lower than they were pre-lockdown, they have started to creep back up. Lenders are also bumping up fees, so is now the best time to secure a fixed rate?
Although product numbers and high loan-to-value mortgages are still far behind previous levels, interest rates remain extremely competitive among lenders. This is the case for both standard residential and buy-to-let fixed rates, meaning borrowers can still secure very good deals.
However, the latest information from Moneyfacts shows that things are beginning to shift in the sector. Over the past two months, average lender fees have increased by £48 to secure fixed rate products. There's also been a 5% fall in the number of cashback deals available since July.
Rates, meanwhile, are creeping up, albeit slowly. You can still secure a fixed rate mortgage at an average rate of 2.54% with a fee - and this will vary widely depending on LTV and the deal term. While still 0.35% lower than it was in March, the average rate has risen from a low of 2.29% in July. For fixed rates without a fee, the current average is now 2.61%. This is down from 2.80% in March, but higher than July's 2.28% figure.
What's happening to mortgage fees and incentives?
Most lenders offer deals where you can secure a lower interest rate by paying an upfront fee. However, the latest report from Moneyfacts shows that the fees lenders are charging are on the rise.
Looking at the most recent data from 24th August, Moneyfacts found that the average mortgage product fee was £1,066. At its lowest point, product fees were as low as £1,018 in June this year. Each month since then has seen a steady incline.
There's also been a big drop in the number of products available with free or refunded legal fees, and cashback offers. These mortgage incentives can be hugely popular for borrowers looking to save a lump sum from their mortgage.
Back in March, there were a total of 3,145 free or refunded valuation deals. On 24th August, this had dropped to just 1,575. Likewise, products with cashback incentives have fallen from 1,377 deals to just 646. The data shows that, while these offers are still out there, not all borrowers will be able to access them at present.
Getting the best deal now
With interest rates and fees on the rise, many borrowers are looking to lock into fixed rates now. Stability and the ability to budget to a predictable monthly budget will be particularly beneficial in the current climate for many. This applies to buy-to-let landlords and property investors, too.
According to Eleanor Williams, finance expert at Moneyfacts, says borrowers switching from a standard variable rate will save an average of £150 month on their mortgage rates.
She adds: "There may be mortgage borrowers who want to take advantage and secure a new deal but are hesitating due to concerns around needing to cover additional expenses, such as paying a product fee or having to meet other set-up costs like conveyancing fees or valuation expenses. The average fee charged on a fixed rate mortgage has risen to £1,066, £26 higher than it was in March, and £48 more than in June."
Lenders are still offering fee-free deals, and these could work out more cost-effective for some. Eleanor Williams adds that average rates are only 0.07% lower on fee-carrying deals than those that are fee-free.
Mortgage incentives aren't always all they seem
"Since March, we have also seen stability in the proportion of fixed rate mortgage deals that provide a free or refunded valuation at 71%," she says. "But also an 8% increase in the proportion of deals that offer free or refunded legal fees.
"These changes suggest that ... lenders are still tailoring their overall packages to entice borrowers. It is not surprising though to see a drop in cashback perks to 27% as a proportion of the market, at a time when lenders, as well as consumers, are needing to rein in lucrative upfront cash incentives.
However, mortgage incentives are likely to "only cover the basics", adds Eleanor Williams. Many products offering free legal fees only cover standard conveyancing, for example. And free valuation offers normally only provide a basic valuation.
"Deciding on the right mortgage deal is about more than just the initial rate offered, but with rates rising and the stamp duty holiday set to finish at the end of March 2021, borrowers may wish to act swiftly as demand could spike and application processing times could extend."
The best advice, according to Moneyfacts, is to seek independent financial guidance to find the best deals.
Source: Buy Association