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Ray Boulger: 5 year fix the way to go

Nia Williams

February 8, 2013

Following on from yesterday’s Bank of England Base Rate decision, Boulger said: “The MPC’s comment about expecting inflation to remain above its target rate for another two years but then fall back to 2% reinforces the view that the next increase in Bank Rate is still a long way off.

“However, this is already reflected in fixed rate pricing and we believe that 5 year fixed rates continue to be the product of choice for those comfortable with being locked into early repayment charges for 5 years.”

Boulger believes that competition in the sub 2% two year fixed rate market up to 60% LTV will degenerate into tiny cuts below 1.99%, financed by a steep increase in the arrangement fee.

As he said: “This may attract some headlines and even guarantee a place in some so called best buy tables where the computer picks the cheapest rate and ignores everything else.

“More choice in the perennial trade off between rate and fee is good, providing consumers choose the genuine best option for their mortgage size rather than being seduced by the lowest rate when a higher rate with a lower fee, and perhaps some freebies, may be better value.”

He said: “The larger the mortgage the more likely it will be worth paying a higher fee to obtain a lower rate, particularly on a five year fix where the impact of fee once amortised into the rate is much less than on a two year deal.”

Reiterating the importance of consumers taking advice, he said: “Consumers… often struggle to understand this rate/fee trade off and in particular how much impact a bigger fee has on the real cost of a short term deal.

“Furthermore, anyone tempted by the regulatory requirements to display the APR prominently to use this as a way to compare such deals will be seriously misled as the fee is effectively amortised over the whole mortgage term rather than just the fixed rate term.

“On a two year fixed rate the initial rate has little impact on the APR because the calculation assumes the borrower reverts to the APR for the remainder of the term. Thus, assuming a typical 25 year term the initial interest rate is only used for less than 10% of the total interest cost.

“Despite this, the FSA requires this misleading information to be prominently displayed in all promotional material, thus rather comprising its requirement that all promotional material should be “clear, fair and not misleading.”


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