Homeowners will spend on average £5,000 chasing cheap mortgage rates, loveMONEY research reveals.
For many years lenders have been bulking up profits by offering mortgages with a low rate but then charging borrowers a massive ‘arrangement fee’ when they apply.
And while our research doesn’t suggest that chasing the lowest mortgage and remortgage rates is always a bad idea, it does highlight the importance of comparing the total cost of a deal before signing up.
This is especially true if need to borrow a small sum or live in an area where house prices are lower, as the fees will obviously equate to a greater percentage of your overall costs.
How the costs add up
According to the Council of Mortgage Lenders, the typical mortgage term still stands at 25 years, although this is slowly increasing.
After speaking to a number of mortgage brokers and experts, we found typically, over this period, the average homeowner in the UK is likely to remortgage every five years – so that’s five times over the duration of the mortgage term.
Mortgage advisors at Which? have said that while remortgaging fees can vary anywhere between totally free and £2,000, most can expect to fork out around £1,000 on arrangement fees alone, and in some cases as much as £500 more for legal and exit fees.
Paying fees of around £1,000 each time means that over the 25-year mortgage term, these fees can stack up to £5,000 – an extra £5,000 on top of your existing mortgage and interest payments.
Fees vs rate
So does this means you should never go for the cheapest deals on the market? Not necessarily, says Raymond Boulger, senior technical manager at independent mortgage advisors John Charcol.
"The basic rule is that the smaller the mortgage and the shorter the term of the initial deal the bigger the impact the various costs have on overall value,” he says.
“Therefore, based purely on rate and fee those with a small mortgage are likely to be better off choosing a longer term deal.”
However, Boulger adds that, because there are always other factors to consider, “it is not that simple”.
"In particular with interest rates at all-time lows there is an added reason to lock into a longer term fixed rate – five, seven or 10 years, whatever the mortgage size,” he says.
"Locking in to a longer term rate and hence avoiding the need to remortgage every two years also avoids the risk that a change in personal circumstances or lenders’ criteria makes it impossible to remortgage, as well as reducing costs.
“If fear of incurring an early repayment charge (ERC) worries anyone otherwise tempted to take a longer term fixed rate there are some good fixed rates with no ERC."
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