There are lots of factors involved in choosing your mortgage. One Fool gives you some tips on calculating the true cost before you sign on the dotted line.
In so many ways, comparing financial products online is easy. Not so with mortgages. When we compare mortgages, it may seem simple to glance down over the interest rates for the best one. Most mortgage comparison tables also show such things as the early redemption charge amount and period.
However, there are always other costs to bear in mind. One of the big ones is the arrangement fee. Some providers are now charging a whopping flat fee of £1,500 just to arrange your mortgage. Mark Harris of Savills Private Finance recently pointed out that Portman, Northern Rock and Bristol & West charge 1.5% of the loan amount as a fee, which means a charge of £2,250 on a £150,000 mortgage. Harris also points out that this sort of charging structure isn't transparent, as it effectively turns seemingly best-buy mortgage rates of 4.48-4.59% into less competitive 5.23-5.34%.
If you're looking for a 20-year, £100,000 repayment mortgage, you might get a five-year deal charging, say, 5%. You'll pay £660 per month and after five years you'll have paid £39,600. If you have the same mortgage charging 5.5%, you'll pay £688 per month and £41,280 over five years.
But you have to factor in the various charges. The arrangement fee can be the big one. If the first mortgage with the lower rate charges you £1,500 and the other charges you £600, you'll now find that the second mortgage with a rate of 5.5% is cheaper over five years by £220. The saving will be even greater if the arrangement fees are added to the mortgage, as this will increase the interest payments as well.
So Harris has a point about high charges and how presentation can be deceptive. However, high charges don't necessarily turn a mortgage into a bad product. The larger the mortgage, the more likely you are to be better off with higher charges and a lower interest rate. Comparing not just the interest rate, but all the charges too, is part and parcel of finding that most suitable mortgage.
And another thing: if you're going to remortgage or sell your property, you may also need to consider how much of what you've paid has gone towards paying off your debt, as opposed to interest. In this regard, going back to our two mortgage examples, the 5% mortgage comes out better, as your mortgage after five years would be just £83,455, compared with £84,188 on the 5.5% mortgage, meaning you've paid off an extra £733. These myriad factors are the price we pay for having a competitive mortgage market with more than 8,000 products to choose from!
The fees to take into account include:
- valuation fees;
- arrangement fees;
- legal fees;
- early redemption fees; and
- exit fees.
To calculate which mortgage is cheapest, you need to consider how long you want to keep your mortgage for. The Foolish thing to do would be to look around again when any introductory deals expire, so you should compare costs over that period. To make it easier, you can calculate indicative monthly costs using The Fool's mortgage calculator. Then you add on the charges.
> The Motley Fool Mortgage Service can do all these calculations for you. We'll search the whole market of 8,000+ mortgages.