Some mortgages seem to give with one hand, while taking away with the other. Hereâs how to get past all the sleight-of-hand and find out which is really the best mortgage deal for you.
Mortgages are confusing. Some are very confusing. Some are so confusing that it seems as if theyâve gone to a special effort to be that way. And often the result of this confusion is that you end up paying much more than you need to â even when you thought youâd found the best deal.
Itâs often the case thatÂ âthe rates giveth, the fees taketh awayââ¦ or vice-versa. And it can be hard to tell at the outset which way round it might be. Then there are all the different mortgage types to consider: fixed, tracker and discount, not to mention all the competing providers. Nor does it help that you may need to arrange your mortgage in a hurry, or fail to clinch your dream home.
What we need is a cheat-sheet for cutting through the mortgage mayhem. So here it is.
Know your deals
A fixed rate mortgage means your interest rate wonât rise during the deal period. A tracker mortgage will track the Bank of England base rate (usually staying a fixed distance above it) during the deal period. A discounted mortgage works like a tracker, except it tracks the lenderâs own Standard Variable Rate (SVR), which will be higher than the base rate, and which the lender can change any time they like. You have been warned.
Remember those words: âDURING THE DEAL PERIODâ
If you know it already, this is just common sense â but itâs amazing how many forget this crucial point. The terms of a mortgage deal apply only for the short period of the deal (as little as a couple of years), after which the mortgage reverts to the lenderâs SVR. This is the point at which you WILL remortgage (promise yourself!). Donât sleepwalk into making excessive mortgage repayments for the next twenty-odd years.
Weigh up rates against fees
Always look beyond the interest rate. Mortgages come with a host of different fees, which may cancel out the benefit of a low rate and make a brilliant-seeming deal actually pretty poor. The rule of thumb goes like this: with a bigger mortgage, look for lower rates, and with a smaller mortgage, look for lower fees. However, you wonât know what counts as big/small enough until you do the sums.
Know your fees
Mortgages come with more additional fees than a budget airline flight. Not all deals will have all these fees, and even this list isnât exhaustive, but here are the main ones to look out for:
- Arrangement fee â may be nothing, may be over Â£2,000.
- Application / booking fee â NOT the same as the above and usually small… but donât be fooled by a small application fee and mistake it for the arrangement fee.
- Valuation fee â not always charged, varies with the price of the property (can be up to Â£1,500).
- Mortgage account fee â essentially the admin costs. Not much (Â£100-Â£300) but it all adds up.
- Higher lending charge â often applies to high loan-to-value mortgages, and is around 1.5 per cent of the mortgage value. Another reason to try and raise a larger deposit.
- Early repayment fees â the big one! Can be up to 5 per cent of the mortgage value (thatâs Â£7,500 on a Â£150,000 mortgage). May apply beyond the terms of the deal itself â see below.
- Exit fees â sometimes payable at the end of the deal. Usually low, but still factor these in.
Beware the lock-in
Another big reason to be wary of early repayment fees (see above) is that they may apply beyond the terms of your actual mortgage deal. For example, you may have secured a fixed or tracker rate for two years, but one with early repayment penalties covering a total of five years. With this deal, your mortgage would revert to the lenderâs SVR after two years, leaving you facing three years of higher (and unpredictable) repayments before you could switch â or else a hefty fee. Always check the terms of early repayment and weigh up all the risks before you sign anything.
Donât âput it on the tabâ
Do not be tempted to add fees to the mortgage, as then youâll pay interest on them. Itâs very tempting to do, because when youâre dealing with tens or even hundreds of thousands of pounds, it seems as if a little more here and there wonât make a difference. But all that money is still real, and youâll have to pay it sometime. Bite the bullet and pay it now, and youâll pay less overall.
Bear in mind extra benefits like cashback â but tread carefully
Some mortgages offer the temptation of cashback when you take out the mortgage, up to around Â£1,000. But donât let the prospect of up-front cash sway you too much, as there could still be better deals out there which cost you less in the longer term.
Always think ahead
Mortgage lenders pay for their office parties thanks to the people who donât look far enough ahead. Todayâs good deal may be tomorrowâs headache. Remember that mortgages are complicated and about far more than just the monthly repayments. Think about everything that might change in the next few years (from interest rates to your own circumstances) and factor it in.
Finding the best mortgage requires more than just shopping around â it means knowing exactly what to look for and being able to compare very different deals very quickly. This is hard to do on your own, even armed with the internet. A whole-of-market mortgage adviser or an IFA can search through every suitable mortgage (including many not available on the high street) to find the deal that represents best value for you. As weâve seen, working out which mortgage is really the best is far from simple, even if you know what youâre doing. Give the job to an expert and you could save a lot more than their fee.
If youâre trying to get a good mortgage deal, a lot depends on your credit score. You can check your score, see how it might affect your prospects and even find out how to improve it at Experian CreditExpert.