Considering that the average true cost (taking into account all fees) for the 10 most competitive two-year discount deals is currently around £138 a year lower than the comparable two-year fixed rate deal, mform.co.uk is urging borrowers to break the pattern of remortgaging to another fixed rate.
The average true cost of a two-year discount is £17,724.98 on a £150,000 remortgage compared with £18,000.86 for a fixed rate.
However borrowers who rely on best buy tables based on the headline initial rate will pay much more – for a two-year discount the true cost would be £18,783.20 and for a fixed rate £19,410.40.
Borrowers opting for discounts will also benefit if the Bank of England cuts the base rate from 5.75 per cent. Every 0.25 per cent cut would be worth £375 a year on a £150,000 interest only mortgage, mform.co.uk states, and experts are predicting up to three 0.25 per cent rate cuts next year.
Swap rates on the UK money markets are presently offering cheaper rates for longer terms indicating the market’s consensus that interest rates will be lower in the near future and the benefits of those falls will be felt by discount deals.
Francis Ghiloni, mform.co.uk marketing and business development director, said: “Based on true cost discount rates are already better value for borrowers but if, as expected, rates do drop next year they will become even better value.
“The money markets are banking on rate cuts and lenders are pricing appropriately. Our advice would be that anyone remortgaging should consider discount rates ahead of fixed rates.
“Of course those on tight budgets may still want to opt for the certainty of fixed rates ahead of the possible risk of variable rates. Everyone though should be focusing on the true cost of their loan and should not look simply at the rate.”
The best value two-year discounts currently available are from Barnsley Building Society and the Co-Op Bank with initial rates of 5.39 per cent and 5.89 per cent. Best value two-year fixes are from Newcastle and Cheshire Building Societies at 5.45 per cent and 5.49 per cent.
Yorkshire, Cheltenham & Gloucester and Lloyds TSB all offer discount deals with initial rates of 4.99 per cent – but they include start-up fees of £4,370 and £3,849.
Similarly there are two-year fixed rates from the same lenders at below five per cent plus others from lenders such as Chelsea and Leeds Building Societies but again they all come with hefty initial fees of up to £5,535.
