Loans that score on penalties

Daily Mail
17 November 2006
Homebuyers should beware of tempting, low rate mortgage deals - as the sting in the tail can prove expensive.

This week, Egg launched a two-year fixed rate of 4.74% - less than Bank of England base rate. It is also offering a discounted variable rate mortgage with a current rate of 3.99% for two years.

However, both have swingeing overhanging penalties which will tie in homebuyers for years after the special deal ends.

Each also has a fee of £399. For the two-year fixed rate, if you want to get out in the first year there is a penalty of 3% of the sum borrowed, then 2% in year two and 1% in the third year.

And in that third year, the rate you pay will be based on Bank of England base rate plus 2% - currently, that would be 7%.

It’s similar news on the discounted rate - while the discount lasts two years, the penalties carry on for a further three years. In the first year, the penalty is 3%, then 2.5% for year two, 2% in years three and four and 1% in year five.

The rate you will pay after the initial discount expires is base rate plus 2%. Our Best Buy borrowers’ table excludes any deals with overhanging penalties. And it also calculates the true cost of a home loan including the fees.

So, for example, the Alliance & Leicester’s two-year fixed rate of 4.74pc with its arrangement fee of £799 would cost £14,700 over the two years on a £100,000, 25-year loan.