Jun 15, 2011
The UK’s number one comparison site moneysupermarket.com urges mortgage customers to avoid being drawn in by low interest rates on products which have high fees, and to consider all options before applying, or they could end up paying more for their borrowing than necessary.
Analysis from moneysupermarket.com shows fees for fixed and tracker mortgage products have increased by over 13 per cent since September 2009 making it more difficult for borrowers to compare the true cost of mortgages. Further analysis shows products with the lowest headline rates are not necessarily the best value over the term of the deal. Once fees are factored in, a product with a slightly higher rate but lower set-up costs may actually prove cheaper.
For example, the lowest two-year fixed rate is from Santander at 2.79 per cent, however, this includes a combined booking and arrangement fee of £1,995, meaning the total amount to be paid back over the two years for someone borrowing £150,000 is £18,676. The same amount borrowed over two years with Royal Bank of Scotland at a rate of 2.99 and a fee of only £499, would cost £17,552 – a saving of £1,124 over the two year period, despite the interest rate being 0.20 percentage points higher.
Clare Francis, mortgage spokesperson at moneysupermarket.com said: “When looking for a new mortgage, it’s easy to be lured in by low headline rates, however it is vital borrowers take into account arrangement and booking fees as part of the overall cost. The size of the fees can vary greatly, with some providers offering fee-free deals while the set-up costs on other mortgages can run into thousands. It is therefore vital to work out the total amount you’d repay over the term of the offer.
“That said, for some people it may be worth paying a high fee in order to benefit from the lowest interest rate. It will all depend on the amount you are looking to borrow – on large mortgages a high fee can be worth paying in order to secure a low rate. However, with smaller mortgages, where a high fee will form a larger proportion of the overall loan size, it may work out cheaper to keep the set up costs low even if it means paying a slightly higher monthly payment.
“One thing worth noting is that it rarely proves best value to go for a product where you the arrangement fee is a percentage of the loan size. In fact this can prove a very costly mistake for those looking to borrow a large amount.
“It’s almost always cheaper to opt for a product that charges a flat fee instead, and where possible pay the fees upfront otherwise you will also be paying interest on these too.
“When comparing mortgages you should always look at the total amount you would repay, including fees, over the term of the deal. This is the only way to identify which product will be offer best value to you. Also remember to think about whether you want a fixed or variable rate deal: there’s no point in comparing the total cost of a two-year fix and a two-year tracker without factoring in the possibility that your monthly mortgage repayments could change with the tracker because the rate is linked to the Bank of England base rate.”