This week financial information site Moneyfacts suggested that while first-time buyers may “instinctively” look for the security offered by fixed rate mortgages, they could be significantly better off if they go for a discounted variable deal instead. It confirmed the average two-year discounted variable rate at 95% LTV is now 0.82% cheaper than the average two-year fixed rate at the same band.
Charlotte Nelson, finance expert at the site, said not only do discounted deals offer a chance to minimise monthly repayments, but they may be safer than they appear.
She said: “Discounted variable rates generally offer a discount on the lender’s Standard Variable Rate and due to this link, there is the potential for rates to rise if base rate rises. However, given the current difference between the two averages, first-time buyers could still find themselves better off even if base rate were to increase by 0.50%.”
James Mole, head of mortgages at Gingko Independent, explained that rightly or wrongly many first-time buyers opt for a fixed rate deal because they feel stretched from the beginning and don’t like the idea of a rate rise stretching them further unexpectedly.
He continued: “I don’t think there is anything wrong with discounted variables, however they leave borrowers open to rate rises, and if they are cautious, this doesn’t fit with their risk profile. It feels like we are approaching a rate rise in the near future, and so I see no reason as to why discounted variables will pick up in popularity.”
Aaron Strutt, communications manager at Trinity Financial, agreed that some borrowers are put off discounted variables as there is the uncertainty of a lender being able to increase the rate whenever they choose, and noted that some of the most attractive deals are not available through brokers.
He continued: “The smaller lenders tend to offer the most discounted variable rates and some of these deals available to first time buyers seem to be getting better. There is a selection of building societies providing low discounted rates and they are competing with the biggest banks at higher loan-to-values. Yorkshire Building Society and HSBC have had some great discounted deals in the past although they have not always been as popular as you would have thought.”
Paul Flavin, managing director of Zing Mortgages, argued that “caution is the watchword” when it comes to making a recommendation to a first-time buyer, with a fixed rate a sensible choice for many,
He added: “The ability to budget around the biggest monthly commitment, while adapting to the additional costs of running your own home is more important than getting the so-called cheapest monthly payment for your first-time buyers then leaving them to cope with the inevitable rate increases.
“Of course, if the client favours a discounted product and is fully conversant with the risks involved, then our job is to recommend the most suitable product for their needs. We can only advise, not lay down the law.”