This seems to have stirred up a bit of controversy on the internet and between brokers. Its not controversy on a grand scale but it is not often we have drama in the mortgage world, so let me have this.
I thought it might be useful to post an article on the pros and cons. You can decide what you think of it.
What is it & why is it causing a stir?
Skipton building society launched a very low interest rate of 3.35% this month. The product is fixed for 2 years and is around 2% lower than similar 2 year fixed rate products on the market without a fee. However it comes with a 5% arrangement fee.
Everyone seems to be very firmly in one camp or the other in whether they like the product or do not. The rate is great, but the fee less so. Some people can only see the fee and so see it as a bad thing. They also think there is the potential that people may get carried away with the interest rate and make the wrong choice.
The maths
A £200,000 mortgage with a 5% fee becomes £210,000.
- £210,000 over 25 years at 3.35% is £1,035 per month or £24,840 over 24 months.
- £200,000 over 25 years at 5.79% (with no fee) is £1,263 per month or £30,312 over 2 years.
Over 2 years it is around £5,500 more in monthly repayments, but £10,000 less in fees, so just from a very simplistic level this new product is around £4,500 more expensive over the 2 years.
We also have to look at things like what the balance would be at the end of the 2 years but I feel like that is getting a little too complex for this article. So just to keep things simple we will use the above.
The pros and cons
Lets look at the downside first… Despite the headline interest rate, it is an expensive product. That is because of the fee. In a very simplistic way, the 5% fee adds around 2.5% to the interest rate (it is actually more if you add the fee to the mortgage). That then makes the interest rate 5.85% at best but likely worse as most people will add the fee.
However, lets look at the positives now… Interest rates are high compared to the last 5 years, as is the price of everything it seems. People are struggling to make ends meet. This means people are either going without (food, heating etc) or struggling with other payments. The way to fix this could be to downsize, however this brings its own costs. Selling up brings solicitors and estate agent fees, you may then need to rent or buy somewhere else which will incur more legal fees and potentially stamp duty.
What about if your financial struggles are temporary – applicant is on maternity leave or a child in nursery for example. Both of which you would expect to end within 2 years for most people. This product may help to buy you time. It allows you to stay in your home and close to schools, support group, work… whatever it is that means you want to remain in your home.
You cant have it all…
Lets be honest, the product is not great. It is not cheap, you have to pay a heavy fee for it and that will increase your balance meaning you have to pay a significant chunk before you balance becomes lower.
However, it is a nice product to have available. It might allow people who would otherwise struggle to remain in their home. As we do a lot of mortgages for people with bad credit, it is not uncommon to come across people who have gone through the traumatic experience of losing their home. If this can prevent a few people from doing that, it is a great product for them.
Some people want lower repayments. That can be the case for various reasons but at this point the reasons do not matter. The fact is, they may now have a product available to them that can help deliver what they want or need.
Whilst the product is certainly not for everyone and everyone involved needs to take are that the customer understands the fees, I am definitely in the supporter camp. Whether or not I will use it I am not sure. I do not think we will personally, but it is nice to have it and not need it than need it and not have it.