New 10 year fixed rate offset mortgage from Accord
Ray Boulger of leading independent mortgage adviser John Charcol, comments on the launch of several new products from Accord, the most notable of which is a 10 year fixed rate offset mortgage.
"Accord's new 5.54% (APR 5.9%) 10 year fixed rate offset provides a very welcome addition to the market at a time when no-one is really certain what the future looks like. It will undoubtedly appeal to many people and should certainly be considered as a sensible alternative to some other market leading mortgages. Although the demand for 10 year fixed rates has always been small, there is such a dearth of choice in fixed rates for this term that Accord has certainly filled a gap that needed filling. Furthermore it has done so in some style, not only launching the only fixed rate offset mortgage currently available for longer than 5 years, but also with a market leading rate of 5.24% (APR 5.8%) for its cheaper non offset 10 year fix.
"The fact that these rates are available up to 75% loan to value (LTV) is also a big bonus, as most banks only offer their best rates up to 70% LTV. For borrowers needing in excess of 75% LTV Accord offers 10 year offset and non offset fixed rates up to 85%, but at higher rates.
"The 5.54% (APR 5.9%) offset fixed rate has an arrangement fee of £995 but many of Accord's lowest rates, including the ten year non offset fix at 5.24% (APR 5.8%), do come with a high arrangement fee of £1,995. However, clearly the longer the term of the deal, the less of an issue the size of the fee is as it can be amortised over a longer period. For example Accord offers an alternative non offset 10 year fixed rate of 5.44% (APR 5.9%) with a smaller fee of £995, but for anyone borrowing more than £50,000, the mortgage with the lower rate and higher fee offers better value."
Tracker comparison
"Of course, any knowledgeable borrower will want to know how this compares to the tracker market. The best offset trackers are offered by Woolwich up to 70% LTV at 2.89% (APR 3.0%) for loans between £200,000 and £1m (£1,499 fee) and 3.09% (APR 3.2%) for loans below £200,000 (£999 fee). For loans up to 75% LTV Mansfield Building Society offers 3.20% (APR 3.3%) with a £999 fee.
"The tracker option will clearly be cheaper in the short term, and quite possibly for a several years, with the initial interest rate differential being about 2.5%. However, if Bank Rate averages more than 3% over the next 10 years the offset 10 year fixed rate at 5.54% (APR 5.9%) will ultimately work out cheaper. One thing we do know is that there are more than the usual known unknowns in the current market and it would be a brave person to bet their house on Bank Rate averaging 3% or less over the next 10 years. It is certainly something that any borrower should consider when thinking about their next mortgage."
Is ten years too long?
"Many borrowers are reluctant to lock into a deal for as long as 10 years but the beauty of an offset mortgage is that unlimited overpayments can be made into the linked savings account without incurring an early repayment charge. If subsequently needed, any overpayments can then be withdrawn with no notice. The offset savings account provides a very tax efficient home for any spare cash, as instead of interest being earned on savings at current paltry rates, mortgage interest is only payable on the net balance of the mortgage and savings account, effectively meaning that interest is earned at a net rate of 5.54% on the savings. At the same time any funds in the savings account are immediately available if and when needed, with interest being charged at the mortgage rate.
"In the current uncertain economic climate, and particularly with worries about the risk of a Eurozone sovereign default, with its consequent severe impact on the banking system should it happen, a mortgage offering maximum flexibility in one's borrowing and savings arrangements has even more appeal than normal.
"What the launch of such a product does bring into focus is that there are a wealth of options for borrowers and that no generic advice will do. We strongly advise people to seek independent mortgage advice on their own specific situation before committing to a new product."