The lender giveth and the lender taketh away

Lenders continue to cut fixed mortgage rates in an attempt to get borrowers to switch away from their variable rate deals.

The latest research has revealed the average five-year fixed mortgage rate has fallen below 5% for the first time since records began in 1988.

While the average five-year fixed mortgage rate has stood as high as 6.24% (in September 2009) in the 29 months since bank base rate has been at 0.50%, rates have decreased to 4.99%.

At the same time, the average two-year fixed mortgage rate has fallen from 5.18% in September 2009 to 4.24%, while the average three-year fixed rate has fallen from 5.61% to 4.74%.

With the cost of funding fixed rate mortgages through the swap rate market having fallen to an all time low this is being passed on to borrowers through some of the lowest mortgage rates ever seen.

Lenders are trying to tempt borrowers off variable rate deals and onto fixed rate deals as they are concerned about some borrowers' ability to repay their mortgages when rates finally start to rise.

A proportion of borrowers on variable rate deals will have absorbed the savings they have made from lower repayments into other monthly expenditure, meaning affordability will become a problem when rates go up.

At the same time though, lenders appear to be offsetting the low mortgage rates on offer by increasing the arrangement fees

The average arrangement fee has increased by 17% as lenders battle it out to offer the lowest headline rate. Percentage fees have become increasingly common, with one lender charging as much as 2%.

It means that the average fee has increased by £151 over the last 12 months from £879 to £1,030. There are many fees that far outstrip the average; however, with the highest fee on the market is £3,800.

                                        

There are some mortgages that don't charge an arrangement fee but they are very much at a premium, with only 12% offering this luxury.

Unfortunately too many borrowers still focus their initial attention on getting the best rate, without taking full consideration of the true cost of the deal.

In many cases a low rate with a high fee can work out more expensive than opting for a slightly higher rate, but with a lower fee.