Does stumping up extra cash for a better mortgage pay off?
It is generally assumed that when buying a house the bigger the deposit the better.
However, new research has found that for some borrowers paying a bigger deposit could actually make their monthly mortgage payments more expensive.
According to Moneyfacts, the average mortgage rate for borrowers with a two-year fix and a 25% deposit is 2.01%, while for those with a 30% deposit it is 2.21%.
On a property worth £150,000 with a 25-year term, the average monthly payment on the 25% mortgage would be £636.51 compared to £651.23 for the larger deposit – a difference of £14.72. This works out as £175.64 a year.
The same is true for even larger deposits.
Buyers with a 35% deposit pay an average rate of 1.69%, which costs them £613.39 a month.
Those with a 40% deposit have an average mortgage rate of 1.86% and make a higher monthly repayment of £625.61 – an extra £12.22 a month.
Charlotte Nelson, finance expert at Moneyfacts.co.uk, said: “As competition has ramped up in the mortgage market, rates at the lower LTVs are starting to have more parity, with little difference between the brackets. So, whilst it is generally thought that extra cash will give you access to lower rates, this might not always be the case.”
However, the research found that buyers taking out a mortgage with a smaller deposit are still generally better off though.
A borrower taking out a two-year fix with a 5% deposit will have an average rate of 4.06%, meaning repayments are £796.73 a month on a £150,000 property.
By taking out a 10% deposit the average rate on a two-year fix plummets to 2.74%, saving you a whopping £105.53 a month.
“This means it is more complex for borrowers to find the right deal. They should aim to not just look at the lowest rates, but also the overall cost of the mortgage, considering all fees and incentive packages, and if they are unsure seek advice from a financial professional,” said Nelson.
“Borrowers shouldn’t be disheartened, as whilst overpaying your mortgage might not always get you a cheaper rate, the overpayments will have reduced your overall term, meaning you will be mortgage-free quicker than you would have been otherwise.”
