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► It is not just about interest rates
At Joint Equity we are often asked about interest rates and why ours are what they are. This is especially so when seen in context with headline rates advertised by High Street mortgage companies.
But as with most financial and marketing stories today, the truth is a little more complex than the “sound bite” culture we live in now would make out.
Tamsin has asked me to write an analysis of the real cost of a mortgage.
Firstly its important to understand that the interest rate is not a good indicator of competitiveness because other cost and charges will affect your actual costs.
So, lets see how the current Joint Equity rate of 6.44% really compares with the competition.
► Check the Loan To Value
Beware of the advertised headline rate and the small print. Most lenders have lower rates for lower loan to value (LTV) ratios. So using Kent Reliance Building Society as an example the discounted variable rate for up to 75% LTV is 6.09% and the up to 95% LTV rate is 6.24%. However, for loans over 90% LTV Kent charges for the Higher Lending Insurance which it takes out (costing around £350) and is the equivalent of 0.04% added to the rate, making the rate at 95% LTV 6.28%
Many adverts will use the 75% LTV rate as the attention grabber and it’s always there in the small print that higher LTVs will attract a higher rate, but which rate do we remember? We can not blame the marketers as their job is to grab our attention, and it works.
Note: this article uses rates applying on 7/02/07 the may have changed by the time you read this but the principles are the same.
► Check the additional costs involved
The first additional cost that will affect your overall cost is the arrangement fee. All lenders charge an arrangement fee and some will allow it to be added to the loan amount however you then pay interest on it. The arrangement fee is a way of moving the return for the lender off the headline rate and is a penalty for mortgage switchers.
Most mortgages last around 2.25 years, which coincides with the 2 year discount rate, and then we switch. Therefore the arrangement fee is effectively a cost for 2 years and we an convert it back to a interest charge and add it to the headline rate.
Abbey charges £799 arrangement feeⁿ if we take an average £125,000 mortgage for 2 years it is the equivalent of adding 0.32% to the rate.
The second cost is the valuation fee. Now all lenders charge a valuation fee but if you change lenders every 2 years it is another cost to add to your real interest rate. The valuation fee can be up to £1,100 and that equates to 0.44% addition to the annual rate.
The third cost, which has received a lot of press interest lately although it has lower impact than the previous two, is the redemption or exit fee. Historically these used to be very low around £45 but with lower headline interest rates these fees have edged upwards and now can be around £225ⁿ. This adds 0.09% to the rate.
► Be careful when your discount ends
Finally if you do not switch to a new discounted rate quick enough you are caught by paying the variable rate. The Abbey variable rate is currently 7.34% so the additional cost of the extra 2.1% for 3 months is £656.25.
So what is the effect if we add all these extras up? Well its interesting using 90% LTV the following table compares the real rates you pay.
So the real difference is 0.31% or £10.42 per month, as shown in the table below.
Interestingly if you keep your Abbey mortgage for 3 years the real interest rate is 7.14% against the Joint Equity rate of 6.67%.
In this case the Abbey mortgage is £48.95 more expensive than Joint Equity.
As I said its not a simple matter of comparing headline rate but understanding how the charges affect your real cost and the effect of staying with a discount mortgage too long.
|
|
Abbey Amount |
Abbey % on rate |
Joint Equity Amount |
Joint Equity % on rate |
|
Variable rate |
|
7.34 |
|
6.44 |
|
Initial discount rate |
5.24 |
5.24 |
none |
6.44 |
|
Arrangement fee |
£799 |
0.32 |
£350 |
0.14 |
|
Re- |
£1100 |
0.44 |
None* |
0.00 |
|
Redemption fee |
£225 |
0.09 |
£225 |
0.09 |
|
3 months on variable rate |
£656 |
0.27 |
None** |
0.00 |
|
Total |
|
6.36 |
|
6.67 |
* we say none here because you do not need to revalue after 2 years because there is no need to move your mortgage.
** the rate is the variable so there is no additional cost