0% Mortgages: Too Good To Be True?

0% interest mortgages? Pull the other one; it has got bells on!...Or is there something to them after all? We take a look.

I suspect that most people who see a mortgage advertised at 0% have alarms, clarions and sirens ringing in their head all at once, but is there anything to these mortgages?

I'm going to use The Fool's mortgage search engine, powered by independent researcher Moneyfacts, to help me look into this. The example I'll use will be a £100,000 re-mortgage to a fixed-rate deal on a £170,000 property. The mortgage lasts 20 years, but I'm looking at the cost of the mortgage over five years, as I'll assume my hypothetical mortgagee will want to find a better deal after this time..

Take a look at Table 1 at the bottom of this article, which shows the top five mortgage results sorted by interest rate. The Yorkshire Building Society's 0% mortgage comes up top. You can also see some other remarkably low fixed rates in the table.

However, the lowest initial interest rate doesn't make it the cheapest. Table 2 contains the results of the same search, but sorted by the true cost over five years. As you can see, Yorkshire Building Society's 0% mortgage does not show and nor, for that matter, do any of the other mortgages from Table 1. This means you can expect to pay less for all of the mortgages in the second table over five years, despite the headline interest rates being higher.

The Chelsea Building Society mortgage comes up the best and it's more than £1,800 cheaper than Yorkshire's over five years. This is despite its initial rate being 6.59% higher!

It's a complex business, choosing a mortgage. If you're looking for one to hold for five years like this example, you also need to take into account affordability before and after any initial rates expire. You need to strongly consider how you budget: do you really want to get used to paying £400 at 0% for six months and then be hit by payments of £700? Then you have to consider future interest rates if you revert from fixed to variable interest within the five-year period.

But, for Fools with an inclination towards maths, the 0% Yorkshire BS mortgage does have some bells and whistles. (Erm, to go with its alarms, clarions and sirens.) This mortgage has the option to overpay up to 10% of the capital every year, in regular instalments or lump sums. So if, for the first six months, you were to top up your payments of about £400 to what you expect to pay in six months - perhaps £700 - then you'll have paid off an extra £1,800 in capital, which in turn will reduce your interest payments. But before signing up I suggest you look carefully at all your options and do your sums.

Table 1: Top five mortgages by interest rate

Where a mortgage provider had two mortgages in the table, I've included just their best one.
*This takes into account things like fees and cash back. It assumes £250 for legal fees where appropriate.

Table 2: Top five mortgages by true cost over five years

*This takes into account things like fees and cash back. It assumes £250 for legal fees where appropriate.