It has always been the case that a product’s value cannot be judged purely by the initial interest rate payable. It remains as important as ever to consider the product as a whole, particularly as recent practice by lenders suggests they will use extended penalty schemes and high administration fees to grab attention with seemingly market leading rates.
While extended redemption penalty products seem to be heading towards extinction, and certainly represent a minority in most lenders portfolios, there have been a few recent product launches from lenders that seem to indicate that they have not quite been stamped out yet.
The Co-operative Bank has recently introduced a two-year discount with an initial pay rate of 2.99%, that carries redemption penalties for six years. Prior to this, the Co-Op has offered ‘clean’ deals with no extended penalties. Northern Rock has also revised its product structure in recent weeks, introducing extended penalties across a number of products rather than just the low rated two-year fix which it has had for some time.
A number of its flexible fixed rates now come with an additional 12 months penalty although less keenly priced products are available with no extension. However with cheaper, clean products on the market it is hard to see where deals like this will find an audience other than with the less well-informed borrower.
Redemption penalties are not the only thing that borrowers need to keep a close eye on when judging one deal’s merits over another. The overall cost of a product must factor in the fees associated with the setting up of the mortgage. Key among these is the lender arrangement fee and again there is niggling evidence of these being nudged up to afford the lender the chance of attaching a lower interest rate.
The finger must again be pointed at Northern Rock, which already charges some of the heaviest arrangement fees at £395 and £495 depending on the deal. Britannia Building Society has taken an interesting approach recently, in offering a two pronged approach on its two-year fixed rates, one offering a keener rate with a £495 fee and a slightly higher rate with a £295 fee, giving an element of choice.
The competitive nature of today’s market leads to lenders looking for as many ways as possible to produce eye-catching rates while attempting to soften the blow to the balance sheet with upfront fees or long-term ties. This can only go to strengthen the broker’s position, increasing the need for advice and help in evaluating the ‘true value’ of one product over another.
David Hollingworth is a mortgage specialist at Lomdon & Country