Advisers and their clients need to see past the headline rates and must consider the total costs involved in securing a product, according to Phil Cliff, director of mortgages for Santander for Intermediaries.
While many two-year fixes are currently offering a headline rate of below 2 per cent, longer-term fixes are more likely to be around double this.
However, Mr Cliff argues advisers need to weigh up the pros and cons of their client paying a single booking fee over a longer-term fixed rate mortgage or, as can often happen, paying a booking fee every two years each time a shorter fixed rate deal expires.
Ray Boulger, senior technical manager of John Charcol, agrees and notes that booking fees and the like are relatively unimportant in assessing the overall value of a long-term fix compared with shorter-term fixes because one can amortise the fees over a much longer period.
He says: “The general rule is the longer the term of the initial deal and the larger the mortgage size the less impact fees have on the overall value.
“For example, take a mortgage with total fees - (lender’s fees, valuation and legal fees and broker fees - of £2,000. This would be equivalent to £1,000 a year on a two-year fix but only £200 a year on a 10-year fix.
“Put another way, on an average size mortgage of £150,000 total fees of £2,000 would increase the effective interest rate on a two-year fix by 0.67 per cent but on a 10 year fix by only 0.13 per cent.”
David Hollingworth, associate director of London & Country Mortgages, says: “Borrowers are getting more in to the habit of looking at overall cost but they are still attracted to the headline rate.
“If they can get 2 per cent from a two-year fixed rate deal some will always take having the pound in their pocket at the moment. But they are increasingly aware that two years will come around quite quickly.”
