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Defaqto on Coventry Intermediaries’ ERC-free 4.25% Flexx Fixed to 30.09.13

View of Defaqto insight analyst for banking David Black

Black says: “While the bank base rate continues at its historic low of 0.5 per cent, borrowers face a tough choice when deciding whether to pay for the certainty of a fixed rate or whether to take their chances with a base rate tracker or alternative variable rate mortgage. 

The initial rates payable on tracker mortgages are currently significantly lower than equivalently termed fixed rate counterparts. Only hindsight will determine which will prove to be the best choice financially in the light of future bank base rate changes.

Against this backdrop, some borrowers might like the potential comfort blanket of either a base rate tracker mortgage with a cap to protect against excessive base rate increases or a drop-lock mortgage to give the option to switch out of a fixed-rate mortgage.

Taking an alternative tack, the Coventry Building Society has launched a range of two, three and five-year fixed-rate mortgages which do not have early repayment charges. Such mortgages are a rarity in the market, with offerings from Newcastle Building Society and exclusives from Legal & General Mortgage Club available elsewhere.

Clearly the interest rates charged are a significant factor. Looking at the rates charged for the highest LTV of 85 per cent offered by the new Coventry range it is apparent that quite a premium is charged for the absence of an early redemption charge compared to the best available rates elsewhere.

Looking at mortgages with a broadly similar fee to the Coventry’s £999, the Yorkshire Building Society is highly competitive for fixed rate mortgages over all of the two, three and five-year fixed-rate terms. At two years, the Coventry has a rate of 4.25 per cent whereas the Yorkshire charges 3.24 per cent. At three years the rates are 4.55 per cent for Coventry and 3.64 per cent for Yorkshire and for five-year fixed-rate mortgages they are 4.99 per cent and 4.24 per cent respectively.

The Yorkshire has lower fixed rates, but it does – like the vast majority of fixed rate mortgages – levy early repayment charges. The rate differential is further redressed by the additional incentive of the Coventry’s free valuation up to £670 and remortgage transfer service. At lower LTVs a similar picture emerges with a variety of different lenders’ products offering stiff competition.

Coventry’s new range has increased the options available in the market and may prove attractive to certain types of borrower who want the mixture of both rate certainty as well as the flexibility to make unlimited overpayments without suffering early repayment charges.”

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