How do you work out which mortgage deal is best for you? It's easier than you'd think, says lovemoney.com head mortgage broker Tim Wilson.
My name is Tim Wilson, I'm Welsh and I'm a mortgage broker here at lovemoney.com.
Don't tell me: from that description, you've already assumed I must be a pretty boring guy. If you met me at a party, you'd probably be so desperate to steer the conversation away from mortgages and Wales (and possibly my favourite sheep), you'd immediately start talking about more interesting things. Things like which plug you use to block your kitchen sink or the colour of your living room wall. (Trust me, I know from experience.)
But not, of course, when you want a new mortgage. Then let me guess - you'd talk my ear off all night. And I reckon, one of the first things you'd want to know is: how do you work out which deal is the best deal for you?
Well, today is your lucky day, because I'm going to tell you.
How to pick the right product
This tip is based for people who have decided on what type of mortgage deal (fixed rate, tracker or discount) that they want and are looking at a few lenders as an option. If you need advice about which type of mortgage to go for, I'd recommend you read this expert analysis about what's going to happen to interest rates this year, this article on fixed rate mortgages and this article on trackers.
OK, now you know what type of deal you want, the first thing people usually look for is the deal with the best interest rate. After all, the lower the rate, the cheaper the mortgage payments - right?
Wrong. What about the fees? You tend to find that the lower the interest rate, the higher the fees! And if you end up adding the fees to the mortgage loan, you'll pay interest on those fees for the rest of the mortgage term.
To put it another way, the fees can effectively bump up the interest rate of a deal, making it more expensive every year.
So how do you work out whether the deal with the lowest interest rate really is the best deal for you?
Step one: Compare similar length deals
First of all, you need to be comparing similar length products, for example a 2 year fixed rate against another 2 year fixed rate.
Step two: Figure out what your monthly payments will be
Next find out what your monthly payments are going to be (excluding the arrangement fees for now). Use our excellent monthly payment mortgage calculator to figure this out.
Step three: Figure out what your total payments will be
Calculate the amount you will pay for the 2 years (e.g £500 per month for a 24 months fixed rate = £12,000 ).
Step four: Add on the fees
Then, add on all the fees involved in the mortgage, for example:
- The arrangement/product fee, if there is one. Typically, this fee ranges from £599 to £1,499, and is around £1,000 on average.
- The booking fee, if there is one. Typically, this fee ranges from £99 to £199.
- The Telegraphic Transfer Fee, if there is one. This is typically £35.
- The survey fee. This depends on the valuation, but is usually around £300 to £350.
- Any legal fees. For a remortgage, you're looking at £250. For a purchase, you're looking at around £500 or perhaps even more.
Don't forget to take off any fees at this point, if - for example - you are getting £250 cashback for remortgaging, as sometimes lenders offer these deals.
Step five: Compare the deals using the true cost
Once you've added the fees onto the total payments you will make, this will now give you a true cost figure over the 2 years of your product. The lowest amount will be the best product for you!
A real example
Let's have a look at a real example so I can show you the difference. Let's imagine you're a nice Welsh lady from the valleys called Fflur, who's rung up the lovemoney.com broker service on our freephone number (0800 804 4045).
You want to buy a £150,000 house with a £40,000 deposit. You know you want a two-year fixed rate on a repayment mortgage with a 25-year term.
You've had a look at the latest mortgage deals, using our innovative new mortgage search tool, which allows you to look online at both direct-only and broker-only deals across the entire market.
The lowest rate that comes up is 3.49% fixed for 2 years, with £2,285 of fees and associated costs.
So the monthly premium is £550.10. Multiply this by 24 months, and you get £13,202.40.
Now add the fees. £13,202.40 + £2,285 = £15,487.40
The cheapest comes up as 3.89% fixed for 2 years with only £1,285 of fees and associated costs. So the interest rate is 0.4% higher, but the fees are £1,000 lower.
Now, the monthly premium is £573.96. Multiply this by 24 months, and you get £13,775.04.
Now add the fees. £13,775.04 +£1,285 = £15.060.04
So as you can see although the 3.49% deal has the lowest interest rate and a cheafper monthly premium, due to the higher fees it works out £427.36 more expensive over the term of the deal!
That's a lot of maths to get the answer
If you don't fancy sitting down and working this all out for yourself, you could - of course - ask me to do it for you. I'm a fee-free broker, so it won't cost you anything. Just email mortgages@lovemoney.com or use our online enquiry form.
Alternatively, you could use our remortgage calculator. It adds up all the fees for you, so it's useful even if you're not remortgaging.
Finally, if you want to have a play with some figures and simply see for yourself which deal comes out on top, then use the lovemoney.com mortgage search tool I mentioned earlier. Look in the results page at the top to work out your cheapest deal.
Whatever method you use to check your figures - make sure you check them! The cheapest rate isn't always the cheapest deal overall.
I've put that in bold because I want you to try to remember that bit if you ever meet a boring Welsh mortgage broker at a party. I guarantee you, it will make his day!
Compare mortgages at lovemoney.com
At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 4045 or email mortgages@lovemoney.com for more help.
This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.