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99.5% of people can’t work out which of these mortgages is cheapest… can you?
Calculating the total cost of a mortgage has become more complicated, as lenders introduce ever more fees.
In fact, new research by consumer champion Which? found that only five out of 1,000 people (0.5%) could correctly rank five mortgages in order of which was cheapest. And fewer than a third (27%) picked the cheapest and most expensive mortgage correctly.
That’s despite nearly half (49%) of the people who took the test, who all either had a mortgage or were thinking of buying a home in the next year, saying they found it easy.
Why don’t you have a go? Which of these mortgages is cheapest over two years on a two-year fixed rate repayment mortgage of £100,000? The answer’s at the bottom of the article, along with an explanation of why.
Deal | Initial APR over two years | Fees | Overall APR |
Deal 1 | 1.74% | £1,545 | 5.2% |
Deal 2 | 1.79% | £1,999 | 3.8% |
Deal 3 | 1.99% | £1,500 | 4.0% |
Deal 4 | 2.24% | £295 | 4.6% |
Deal 5 | 2.29% | £995 | 4.3% |
[Seven reasons mortgage lenders turn you down]
The carrot of initial rates and the stick of fees
Over the past year, more lenders have been introducing enticing initial interest rates for up to ten years on their mortgages. But these don’t usually tell the whole story of what a mortgage will really cost over that period as they don’t include fees.
Just under a fifth (19%) of mortgages have no set-up fees, according to Which? And while interest rates have fallen to record lows in some cases, the average mortgage arrangement fee alone has rocketed to £1,506.
And that’s not the only fee you’re likely to pay to set up your mortgage. Some of the most common mortgage set-up fees include:
Booking fee – this is charged for lender for ‘reserving’ a mortgage for you, particularly if it’s at a special rate;
Account fee – this is charged for setting up the mortgage and closing down when you switch somewhere else or pay it off. If you pay this fee, you’re unlikely to pay an exit fee;
Higher lending charge – this is still charged by some lenders to people who have a smaller deposit, typically less than 25% of the property’s value;
Valuation fee – this pays for a valuation of the home you want to buy or remortgage;
Insurance administration fee – this can be charged if you need buildings insurance and don’t take it out via the lender (which is often more expensive), meaning the lender needs to ‘check’ the suitability of your policy;
Transfer of funds fee – this is a fee for sending the money for the purchase via the CHAPS system. Banks and building societies argue that as it’s a not a wholly automated process, because someone has to check such a large sum of money is going to the right place, they should be able to charge a fee.
The reality is you may be better off with a mortgage that has a higher interest rate but lower fees. Worryingly, over half of people surveyed said the interest rate was the most important factor they used to calculate the cost of a mortgage. Only just under a third (29%) said it was the total cost including fees.
[Take a look at the latest mortgage rates, including fees]
Doing your sums
So how do you go about working out what the total cost of your mortgage will be? Well, if you go via a mortgage broker they should recommend the cheapest deal for you based on your circumstances. However, you should also bear in mind any fee you'll need to pay the broker.
If you’re looking for a mortgage yourself, you should get overall costings (including fees) in the form of a Keyfacts document from different lenders before you make your decision. This underlines the importance of shopping around and not just being dazzled by an attractive initial interest rate.
The Which? research highlights how many set-up fees are not mentioned upfront, so it’s vital you find out exactly what you’ll be charged. There are also fees you could be charged during the course of the mortgage (for example for storing deeds) and fees for moving your mortgage elsewhere or paying it off, such as an exit fee. The latter are very hard to avoid, but you should consider them as part of your overall costings if you’re likely to move after the initial cheaper rate ends.
And while it might be tempting to add your fees to your mortgage, particularly if it’s been a struggle to save a deposit, these will be rolled into your overall mortgage and you’ll pay interest onto them. That means they could cost hundreds or even thousands of pounds extra over the life of your mortgage. If you can, try to pay these upfront in full.
*The answer
The answer is Deal 4, as the smaller fees mean the mortgage is cheaper overall over the two-year period, despite having the second-highest interest rate. Many people in the Which? survey mistakenly just looked at the overall APR (fourth column), which is probably why they claimed the test was “easy”. The overall APR is actually meaningless here, as you’re only looking at the initial two-year discounted interest rate (the second column) and the fees to get the answer.
It can also be argued, and Which? does, that the overall APR is meaningless full stop, as it shows the interest rate over the life of the mortgage. This incorporates any initial discounted interest rate charged and the Standard Variable Rate (SVR) you would move onto automatically once the initial period ends. In reality, the SVR will almost certainly change during the life of a mortgage, particularly the industry standard 25-year period. If you're on a tracker or variable rate, the interest rate could also alter if, for example, the Bank of England base rate the mortgage is tracking goes up or down.
Lastly, many people will switch or remortgage to a different rate well before they’ve paid off their mortgage, meaning they’ll have to do their sums all over again.
