The best way to compare mortgages!

Why the lowest rate is definitely not always the best deal.

When you are looking for a mortgage, the lower the interest rate, the better the deal, right?

Wrong.

Unfortunately, the financial services industry makes it a bit harder than that.

Compare like with like

First of all make sure you are comparing like with like. Some deals are available to all borrowers with a deposit of at least 10%, while others are restricted to those with at least 40% upfront.

Work out what you have and look at deals aimed at you. For example, if you have a 25% deposit you will need to search for deals available up to 75% or higher of the property’s value.

Secondly, you need to decide if you want a fixed or tracker rate mortgage. For help when making this crucial mortgage decision, you might like to start by reading The top mortgages for 2011!

The fact is, a two-year tracker will be significantly cheaper than a five-year fixed rate because you are paying a premium for the security of the fixed rate. So it makes sense to compare the same types of mortgages.

But after all that it’s about the lowest rate, right?

No, still wrong.

Rates + fees = mortgage deal

The interest rate of a mortgage will determine your monthly mortgage repayments, so the higher the rate, the higher your mortgage repayments will be.

Related blog post

But you also pay a fee to your lender to take out a mortgage and this makes up a chunk of the cost. These fees are called arrangement or completion fees though sometimes they are confusingly split into two, with one portion called the booking or application fee.

The average fee is currently £889, according to Moneyfacts, but fees range from zero to £2,500, so it’s essential you include them when you work out the overall cost of a mortgage.

Total cost calculation

Firstly, work out the total cost of your monthly repayments over the deal period you are going for -- if you want a two-year fix then you need to multiply the monthly repayment by 24 months.

Then add on all arrangement and application fees.

And that’s it.

Let’s look at two similar two-year fixed rates, both available with a 25% deposit -- Coventry Building Society’s at 3.30% with a £999 fee, and First Direct’s at 3.39% with a £99 fee.

Based on a £150,000 mortgage, the Coventry deal works out at £735 a month, so £17,640 over two years.

Add on the £999 arrangement fee and the total cost is £18,639.

The First Direct deal works out more expensive each month at £742 a month, totalling £17,808 over two years.

But when you add on the cheap £99 fee the total cost is cheaper at £17,907.

John Fitzsimons looks at the dos and don’ts of arranging a mortgage over the internet.

These deals look very similar but the differences can be stark.

Even more fees

This very issue is the subject of brand new research out from Which?

It says that lenders are bamboozling consumers with a raft of confusing fees that makes it very hard to compare deals.

And it claims there are a total of 39 different types of mortgage fee from booking and administration fees to charges for falling into arrears.

The following example illustrates exactly why attractive headline rates could end up costing customers more once the fees are added on.

“At 1.99% Cheltenham and Gloucester’s two-year tracker at 50% LTV looks like a great deal. However, once you add on the £2,949 in set-up fees, it actually costs £2,435 more over the two-year duration of the deal than the equivalent mortgage with First Direct at 2.19%.”

In other words, what you see is not always what you get with a mortgage. You must look at the total cost of any deal.

But don’t worry, you don’t have to do the sums yourself.

When you use lovemoney.com’s innovative mortgage search tool we will show you the total cost of any deal, based on the time period of your choice.

And if you are still confused why not speak to one of our professionally qualified mortgage advisers who can take you through the mortgage minefield of fees and charges.

In the meantime, here are some of my favourite mortgage deals of the moment.

20 fabulous fixes

LENDER

DEAL

RATE

FEE

MAX LTV

Santander

2-year fix

2.65%

£1,995

60%

NatWest

2-year fix

2.96%

£699

50%

HSBC

2-year fix

2.99%

£399

70%

Coventry BS

2-year fix

3.05%

£999

65%

HSBC

3-year fix

3.24%

£999

60%

Chelsea BS

3-year fix

3.29%

£995

75%

Coventry BS

2-year fix

3.30%

£999

75%

First Direct

2-year fix

3.39%

£99

75%

Yorkshire BS

2-year fix

3.39%

£495

75%

HSBC

2-year fix

3.49%

£399

80%

Norwich & Peterborough

2-year fix

3.89%

£995

85%

NatWest

5-year fix

3.95%

£699

50%

HSBC

5-year fix

3.99%

£99

60%

Yorkshire BS

5-year fix

3.99%

£1,495

60%

ING Direct

5-year fix

4.09%

£1,945

60%

Yorkshire Bank

5-year fix

4.29%

£999

65%

First Direct

5-year fix

4.29%

£99

75%

Yorkshire BS

5-year fix

4.29%

£495

75%

HSBC

2-year fix

4.99%

£99

90%

Newcastle BS

2-year fix

5.15%

£894

90%

20 top trackers

LENDER

DEAL

RATE

FEE

MAX LTV

First Direct

2-year tracker

1.99% (Base + 1.49)

£999

65%

Santander

2-year tracker (remortgage only)

2.19% (Base + 1.69)

£995

60%

Godiva Mortgages

2-year tracker

2.19% (Base + 1.69)

£999

75%

First Direct

2-year tracker

2.19% (Base +1.69)

£99

65%

Coventry BS

2-year tracker

2.19% (Base +1.69)

£999

75%

ING Direct

2-year tracker

2.29% (Base + 1.79)

£945

60%

HSBC

Term tracker

2.29% (Base + 1.79)

Fee-free

60%

Yorkshire BS

2-year tracker

2.29% (Base + 1.99)

£1,495

60%

ING Direct

Term tracker

2.35% (Base + 1.85)

£945

60%

First Direct

Term tracker

2.39% (Base + 1.89)

£99

65%

 

Market Harborough BS

2-year tracker

2.48% (Base + 1.98)

£1,250

75%

HSBC

Term tracker

2.49% (Base + 1.99)

Fee-free

70%

ING Direct

2-year tracker

2.54% (Base + 2.04)

£945

75%

Barclays Woolwich

Term tracker (remortgage only)

2.88% (Base + 2.38)

Fee-free plus £300 cashback

70%

HSBC

Term tracker

2.99% (Base + 2.49)

Fee-free

80%

Yorkshire BS

2-year tracker

3.69% (Base + 3.19)

£495

85%

Post Office

3-year tracker

3.75% (Base + 3.25)

£995

85%

First Direct

Term tracker

3.99% (Base + 3.49)

£999

85%

Nationwide

3-year tracker

4.09% (Base + 3.59)

£995

85%

HSBC

Term tracker

4.29% (Base + 3.79)

Fee-free

90%

Get help from lovemoney

For great how-to guides, explaining everything from how to cut your mortgage costs to how to make money in every room of your house, head over to our Guides section.

If you need help with a specific issue, why not see if your fellow lovemoney.com users can help by asking a question in our Q&A section?

More: Find a competitive mortgage | How to buy a property at auction |The mortgage to kickstart the housing market

Use lovemoney.com's innovative new mortgage tool now to find the best mortgage for you online

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article. 

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.

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