Discounted variable rate could be cheaper than fixed mortgage deal
The average two-year fixed rate at 95% loan-to-value (LTV) is 0.82% more expensive than the current average two-year discounted variable rate of 3.34%.
The research, compiled by data site Moneyfacts, revealed that first-time buyers may be significantly better off if they opt for this product, which offers a discount on the lender’s standard variable rate.
In fact, Moneyfacts said borrowers opting for the average two-year discounted variable rate at 95% LTV instead of the average two-year fixed rate would be £89.25 a month or £1,071 a year better off.
The table below shows the average rates at 95% LTV over the past year, six months and now:
|Average Rates at 95% LTV||A Year Ago||6 Months Ago||Today|
|Two-year Discounted Variable Rate||3.41%||3.51%||3.34%|
|Two-year Fixed Rate||4.03%||3.92%||4.16%|
Charlotte Nelson, finance expert at Moneyfacts, said many first-time buyers tend to stick to fixed rates as they’re the simplest to understand, and because they’re usually a great way to manage money. However, she warns that as fixed rates for those at 95% LTV are on the rise, ignoring other options can be a costly mistake.
She said: “Fixed rates for first-time buyers are going up, with the average two-year fixed rate at 95% LTV well above last year’s figure. In contrast, the average rate for discounted variable deals is still falling, and while the difference between the two rates was already clear to see in previous months, it has now risen to a whopping 0.82%.”
Nelson explained that discounted variable rates generally offer a discount on the lender’s Standard Variable Rate and due to this link, there is the potential for rates to rise if base rate rises.
However, she said given the current difference between the two averages, first-time buyers could find themselves better off even if base rate were to increase by 0.50%.
“It can be a difficult process, puzzling through the mortgage maze when you are new to the process, which is why any prospective first-time buyer unsure of what deal to opt for should seek advice from a financial adviser.”