Q I’m currently looking for a mortgage to buy my first house and I’m very confused as there are so many options.
I have a few mortgage advisers offering me interest rates of between 4.8% and 5.2% for a five-year fixed rate. Are these good?
Is it better to fix it for shorter period and pay a lower interest rate? If I fix it for two years, will the interest rate go up? AP
A On the face of it, those interest rates seem pretty high especially given the fact that we’ve been enjoying several months of record low fixed interest rates.
Even if you got a mortgage of 90% of the value of a property, financial firm Moneyfacts says you could get a five-year fixed rate of 3.39% from Yorkshire Bank and a slightly higher 3.79% from Post Office Money. These are both a lot lower than the rates that you have been quoted.
However, if the figures of 4.8% and 5.2% that you have given are annual percentage rates (APR), they don’t seem so bad. The APR gives you a way of comparing mortgage deals which takes into account all the costs of the mortgage including fees as well as the mortgage interest rate and the rate that the mortgage will revert to once the fixed rate is over. The APR for the Yorkshire Bank deal – which has an arrangement fee of £999 – is 4.5% while the APR on the Post Office Money offering – which has no fee – is 4.3%.
You are right in thinking that you’ll be charged a lower rate of interest if you fix for a shorter amount of time. Again with a 90% mortgage, if you fixed for just two years, you would pay 2.39% with the Yorkshire Bank and 2.49% at the Loughborough building society.
The APRs are higher at 4.6% and 4.7% respectively, and if you only fix for two years you may have to pay a fee for a new deal afterwards, so the overall cost could be cheaper on a five-year deal.
Going for the shorter fix doesn’t make it more likely that the interest rate will go up. Interest rates will go up or down whether you fix for two years or five. The question you need to ask yourself is whether you want the certainty of knowing that your mortgage payments won’t change for five years or whether you are happy to take a gamble that interest rates generally won’t have risen – as they are generally predicted to do – by too much in two years’ time.
Muddled about mortgages? Concerned about conveyancing? Email your homebuying and borrowing worries to Virginia Wallis at virginia.wallis.freelance@theguardian.com
