Beware headline rates and check all fees to get the best mortgage dealHeat Profit
BEST-BUY mortgages are often more expensive than home loans with higher headline rates, potentially costing borrowers thousands of pounds.
Indeed, Ishaan Malhi, chief executive and founder of online mortgage broker Trussle, said that many of the lowest-rate deals on the Market come with high upfront fees buried in the small print.
“The way that mortgages are being displayed is at best inconsistent and at worst misleading,” he said.
“Borrowers are enticed into making decisions based on low headline rates rather than true cost, and can end up paying out more than they would on other available deals.”
For example, one of the lowest rate two-year fixes on the Market is from Santander at 1.09 per cent. The deal comes with an upfront cost of £1,534, which consists of a £1,499 arrangement fee and a £35 funds transfer fee. The deal would therefore cost the average borrower with a 40 per cent deposit £13,759 over the initial two-year period.
Danske Bank’s two-year fix at 1.36 per cent looks more expensive, but there is no additional upfront cost, so it would cost the average borrower £12,800 over two years – almost £1,000 less.
The pattern is similar for five-year fixes. Yorkshire Building Society’s 1.89 per cent rate appears to be one of the best deals available. But the true cost to the average borrower would be £35,254 over five years, almost £1,300 more than Nationwide’s 1.99 per cent five-year fix at £33,958.
Nationwide charges a higher headline rate, but the loan comes with a £500 incentive. Yorkshire Building Society, meanwhile, charges a £995 arrangement fee and a valuation fee of £235.
The cost of mortgages can vary even if the headline rate is the same. For example, Progressive Building Society and Hinkley and Rugby both offer a two-year deal at 1.89 per cent, but the Hinkley and Rugby loan will cost £1,411 more over the two years.
David Hollingworth, associate director at brokerage L&C Mortgages, said: “If you ask a borrower what they are looking for in a mortgage, a low interest rate is likely to be at or close to the top of their priority list.
“Of course, the interest rate is an important element of any mortgage but it’s far from being the only consideration. Borrowers should be looking at a product in the round and seeking out best overall value rather than focusing on any one element.”
Many lenders charge arrangement fees, which can be as high as £2,000. Borrowers might also be asked to pay a booking fee to secure the deal. Valuation fees are common and cover the cost of the lender’s valuation of the property. There are also transfer fees to send the mortgage funds to your solicitor.
Hollingworth said: “Fees can vary dramatically between lenders and between deals, so it’s vital that they are taken into account. Some of the lowest rates can carry some of the biggest fees.”
Some mortgages offer incentives, such as cashback or help towards the costs of buying a house. For example, Furness Building Society’s five-year fix for first-time buyers at 4.5 per cent has no fee and cashback of £1,500.
Nationwide, meanwhile, offers a free valuation plus free basic legal work or a £500 cashback on remortgages. It also gives £500 cashback to first-time buyers.
Hollingworth said: “Most lenders have a range of different deals. So, they might offer loans with a low rate and a big fee, but also mortgages with low or no arrangement fees, plus incentives. Borrowers can then tailor the product to their individual circumstances, but the number of different deals can be confusing.”
Trussle research shows that many borrowers do not consider the true cost of their mortgage deal: fewer than half (44 per cent) take account of upfront fees when they chose a home loan.
At the moment, lenders and comparison websites have to show the Annual Percentage Rate of Charge, which is the cost of the mortgage each year including any associated costs. However, the APRC assumes you stick with the loan for the full mortgage term, so it also includes the standard variable rate after any special deal has finished.
Its usefulness is therefore open to question because few borrowers stick with the same deal for the full mortgage term of 20 years or more. Trussle is calling on lenders to display a true cost figure.
Malhi said: “If lenders can agree on a method for calculating the true cost of deals and make this information clearly available to borrowers, the Market would become far more transparent and would function better for everyone as a result.”