Is this the best mortgage in the UK?
Filed under: Mortgages
Now The Co-operative Bank has come out all guns blazing with what could be argued is the best mortgage on the market.
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Of course, different borrowers have specific needs and preferences, so the best deal for one may not be ideal for another, or available to them. But those who can access the new Co-op mortgage will find it pretty hard to beat.
What's the deal?
The new mortgage is a five-year fixed rate deal priced at 2.79%, the cheapest in its class, and lower than most short-term fixes and most trackers (bar a couple of best buy deals).
In other words you can have your cake and eat it with this particular mortgage – benefit from one of the lowest rates currently available, and have payment security for five whole years.
Borrowers expect to pay a premium for that sort of safety net, and in the past they have done. However, five-year fixed rates now offer serious value for money.
The Co-op five-year fix comes with an arrangement fee of £999. That might sound high, but with the average mortgage arrangement fee over £1,500 it's actually pretty reasonable.
NatWest, Yorkshire Building Society, First Direct and Chelsea Building Society also all offer five-year fixes at sub-3%, but none have a rate and fee combination that is quite as attractive as this deal – although they are pretty close.
Michael Ossei, personal finance expert at uSwitch, said: "Five-year fixed rate mortgages have hit a new low with the launch of Co-op's new market-leading loan, which wins hands down on both fee and rate."
Andrew Montlake, director at mortgage advisers Coreco, agrees: "Five-year fixes are
where the value is, as the rates are below most tracker rates, which is phenomenal.
"These super low fixes will be the norm for the next year or so, and I believe that those borrowers who bag one will be getting the lowest rates of their type for a generation."
So is this deal a total no-brainer for mortgage borrowers?
Not for all
The biggest drawback of the Co-op mortgage is that you need a very hefty 40% deposit or equity to get it. This will rule out many borrowers, particularly first-time buyers.
Fixing for five years is not suitable for all borrowers, as it means you are making a medium-term commitment to that specific deal and lender. If you want to move your mortgage sooner you will incur early repayment charges which can be very expensive – often costing thousands of pounds.
If you are buying your first home and it's a one-bed studio flat, for example, you may only expect to be there for a couple of years before needing somewhere bigger. The same can be said for borrowers who know they may relocate with work, but want to get onto the ladder now, or couples thinking of starting a family who expect to need more space in the coming years.
While many mortgage deals are technically 'portable' to a new property, no lender will give you a cast-iron guarantee that you can switch a mortgage over to your new home – it's possible you could end up incurring early repayment charges simply by moving house.
If you don't think you can commit to a mortgage for five years you might be better off considering a short-term fix, or a term tracker that comes without restrictive tie-ins.
Montlake says: "Five-year fixes won't be suitable for everyone, and there may be better options out there. Those who don't want to commit to a five-year mortgage could consider a two-year fix, which currently start from 1.99%. If it's your first purchase, or you are unsure about the best option for you, you need to take independent advice, rather than just following the headline rates."
Not the cheapest
While the Co-op deal has one of the lowest interest rates available, you can find mortgages that are a bit cheaper. HSBC's term tracker at 2.54% is a good example and for borrowers with a large mortgage this could make a noticeable difference to your monthly repayments.
On a £400,000 mortgage the Co-op five-year fix would cost around £1,853 a month and the HSBC tracker £1,803 a month (based on a 25-year repayment mortgage). Over five years that's a £3,000 saving with the tracker. Of course, there's a risk that the tracker could rise in line with interest rates, but, if rates stay low, you could end up saving with the tracker for even longer than five years.
The Co-op deal can be pipped on rate alone, and it won't be available to all borrowers, but for those who are looking to fix their rate for the medium term, it's currently hard to beat. As Montlake says: "If you know what you want, and you are ready to commit to your homeloan for five years, this deal is a no-brainer."