In the period we find ourselves in of ever-fluctuating mortgages, borrowers are often enticed by the siren call of low mortgage interest rates. Recent headlines have been ablaze with news of rates dropping after reaching unmanageable highs over the last 6 to 12 months, and it’s natural for prospective homeowners and existing remortgage borrowers to feel a rush of excitement. After all, who wouldn’t want to secure a mortgage with a seemingly irresistible interest rate? However, before you rush headlong into what appears to be a financial haven, there’s an important caveat that borrowers must heed: be wary of low interest rates paired with high product fees, which can amount to a staggering 7% of the mortgage size.
The Temptation of Low Mortgage Interest Rates
There is no denying the allure of low mortgage interest rates. They dominate the media, plastered across advertisements, enticing borrowers with the promise of affordable homeownership after thousands of borrowers were faced with interest rates of 7% or 8% only a few months ago. It now seems that as inflation reduces and the Bank of England freeze their base rate increases, Banks and Building Societies are dropping rates down to below 5%. And of course, they are quick to promote these low rates, for it not only garners attention but also appears beneficial to them.
However, it’s essential to understand that often, the headline rate serves as a tantalising hook to reel customers in, and it may not necessarily be the most suitable option for every borrower. Jumping at a low interest rate mortgages without doing thorough research is going to be one of the biggest downfalls of mortgage borrowers, who don’t seek financial advice moving forward. That’s why you should always speak with a mortgage advisor before you make any rash decisions.
Recent Low Rate Lender Products With High Fees
Consider this: one mortgage lender, Paragon, recently made headlines by announcing their lowest 5-year fixed rate in over a year. Starting from 9 am on September 27th 2023, they proudly showcased a 5-year fixed rate at a significantly low 4.69% for their buy-to-let portfolio landlord products. At first glance, rates beginning with the number 4 can be incredibly appealing. Especially since the average rate in the UK is still above 6%. Still, borrowers must exercise caution, as these rates might not make sound financial sense when considering the bigger picture. Low rates right now often come with hidden fees that are sometimes overlooked by borrowers.
The Burden of High Product Fees
One of the most critical factors to consider alongside low interest rates is the often-overlooked spectre of product fees. These fees can lurk in the shadows, waiting to pounce on unsuspecting borrowers, and they can amount to a staggering 7% of the mortgage size. Paragon, the same lender offering the attractive 4.69% rate, is also providing a range of fee options for their products, ranging from 7% down to a Nil fee for some borrowers. Lets’ look at an example of what this could look like:
Term: 30 years
Interest rate: 4.69%
Monthly payment on interest only: £1,173
Potential maximum product fee to access this deal: £21,000!
While a Nil fee option may seem like a saving grace, the fact remains that many borrowers may still find themselves drawn to rates that appear lower but come with hefty fees attached. In some cases, these fees can negate any potential savings from the lower interest rate. It’s crucial for borrowers to meticulously examine the cost implications with the help of a qualified and experienced mortgage professional and evaluate whether the associated fees align with their financial goals and capabilities.
The Pitfall of Fixed Rates
Another trap that borrowers must navigate when opting for low fixed rates is the inflexibility of the arrangement. When you commit to a fixed-rate mortgage, you are essentially locking yourself into that rate for a specified period, which, in Paragon’s case, is a lengthy 5 years. While this might seem like a secure choice, it comes with a significant downside: if interest rates decrease during this time, you will not reap the benefits of these lower rates. Instead, you may find yourself paying more than necessary. As we can already see interest rates are dropping almost on a daily basis and who knows how low they might be in a year or two.
Furthermore, these low rate mortgages often come with substantial early repayment penalties. Should you decide to break the contract early or sell your property, you might find yourself facing large charges that could significantly impact your finances.
Always Speak To a Mortgage Advisor
In the world of mortgages, the allure of low interest rates can be overpowering, like a siren’s song luring sailors to volatile waters. However, borrowers must exercise caution and look beyond the headline rates. High product fees, which can amount to a staggering 7% of the mortgage size, coupled with the inflexibility of fixed-rate mortgages, can turn what appears to be a fantastic deal into a financial burden.
When considering a mortgage, it’s so important to get professional advice to help you to make the right decisions when it comes to a new property loan. At Oportfolio, our job is to know all the most up to date information about mortgage lenders and the products they offer. And we are here to help you to choose the most competitive and most beneficial product for your circumstances. If you are looking to get a new mortgage or refinance your existing property, call or email our team today to see how we can help you.