Hamptons Mortgages has issued a warning to consumers not to be seduced by attractive headline mortgages rates that come with extended early redemption charges and a commitment to stay on the standard variable rate for a fixed period.
Hamptons explains that lenders often offer extremely low initial rates. However, these often come with conditions and heavy early redemption charges for borrowers. These early redemption penalties apply not only to the initial rate period but for an extended period following this, during which the borrower must remain on the standard variable rate.
As the average borrower remortgages after 2.5 years, with a hangover mortgage rate they could be liable for early redemption charges of around £7,000 on a comparatively modest loan amount of £100,000.
When compared with deals without extended early repayment charges and taking into account the period the borrower must spend on SVR, this type of hangover rate is considerably worse value than other deals without such tie-ins.
On a £100,000 mortgage borrowers will pay £175 a month for the first two years then leap to £567 a month from years three to five; more than tripling their monthly payments. If they remortgage to a cheaper deal they have to pay £7,000 during the third year.
Jonathan Cornell, technical director for Hamptons Mortgages, says: “The hangover mortgage rate could leave you with a nasty taste in your mouth at the end of the fixed rate period. Most consumers fail to understand the implications of these too good to be true deals and end up paying through the nose.
“Lenders have a duty to ensure that the costs and consequences of such deals are made crystal clear and brokers must ensure their clients are fully aware of the implications of signing up to a hangover rate.”