First-time buyers can become obsessed with best buy tables appearing in the Money sections of national newspapers.
Headline grabbing rates from major lenders can suck in those looking for the cheapest mortgage rate. HSBC recently cut a two-year fixed rate deal from 0.01 per cent to 1.98 per cent for the sole purpose of reaching the top of the best buy tables. It matters great deal to lenders and many will do whatever they can to produce those headline rates.
The Post Office also recently launched a 2.74 per cent five-year fix while Chelsea Building Society pipped HSBC with a two-year fix at 1.89 per cent.
All the rates are dazzling low and the cheapest ever mortgages available with the funding for lending programme kicking in. A combination of ultra-low interest rates and Government attempts to keep bank funding cheap have led to major price competition.
Using best buy tables
Price competition is great for consumers but there is a way to use best buy tables properly and avoid being hoodwinked by the headlines.
Firstly, look out for mortgage fees. The HSBC 1.98 per cent deal, for example, comes with a whopping £1,999 arrangement fee. Cheap rates can often be subsidised with huge fees after they have customers’ attention, hoping they will not be discouraged.
Secondly, check out the size of the deposit. First-time buyers mostly need mortgages with low deposits but these rarely appear in the best buy tables. The greater the deposit needed the lower the interest rate and cheaper the deal, so always check the loan to value ratio. The best deals usually centre around 40 per cent deposits and higher while anything that is around 10 per cent will likely be a relatively high rate.
Thirdly, check the length and nature of the deal. Shorter deals offer less certainty and are usually cheaper as a result. Over the next two years it seems unlikely that interest rates will rocket at the Bank of England. However, over five years it is perfectly possibly that interest rates could increase rapidly. It is why the cheapest two-year deal is 1.89 per cent while the cheapest five-year is 2.74 per cent. But many will find comfort and value in the longer rate even if it is more expensive in the short-term.
A best buy table will only tell you what the rate is and not how the shape of a deal may suit your particular needs. For instance a fixed rate deal will offer total clarity about monthly payments over a set period whereas standard variable rates are liable to fluctuate with interest rate movements.
SVRs have also been known to increase at banks in recent times without interest rate rises at the Bank of England. A best buy table will not make this clear.
A mortgage broker will always remain the best source of independent mortgage advice to guide the biggest financial decision of your life.
Fourthly, best buy tables do not tell the full picture on who can actually access a deal and the criteria that needs to be met. Cheap rates are in high demand and lenders often fill up their tranche of allocated lending very quickly. It means they can be highly selective and choose borrowers they believe are highly likely to repay in full.
It means the best deals can be the most restrictive and lead to disappointment for borrowers who see a cheap rate only to be denied when they inquire about the deal.
Is it worth it?
Best buy tables have a valuable place in the mortgage choosing process to provide a basis for assessing the market.
It is always good to know the market-leading rates and offerings of different lenders but don’t treat it as gospel.
Mortgages are complex and varied so a cheap headline rate will never tell the whole story. Use tables as a limited resource for researching the market but not as immutable commandments chiselled into stone.