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The frightening true cost of the lowest mortgages

The frightening true cost of the lowest mortgages

Category: Mortgages

Updated: 16/11/2015
First Published: 27/10/2015

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Think that opting for the lowest rate mortgage is always the cheapest option? You may want to think again, as our latest research shows that you could end up paying far more than you bargained for.

Hidden costs

It's little wonder that low rates win the day in most borrowers' minds. They're often bombarded with such an array of choice when comparing mortgages that it's unsurprising that so many mistakenly think that opting for the lowest rate will save them money, but this is simply not the case.

Other costs, such as any associated fees, can make that seemingly cheap deal far less so in the cold light of day, and in fact, Moneyfacts can reveal that borrowers may actually be better off choosing a deal with no arrangement fee over a lower rate alternative.

The table below highlights this in more detail, and as you can see, even though the HSBC deal has a higher headline rate, the fact that it's fee-free makes it almost £1,500 cheaper in the first year alone.

Lender Rate details Fees True cost in first year
Lowest two-year fixed rate at 60% LTV Post Office Money® 1.15% Fixed to 31/12/2017 £1,995 £7,520.28
Lowest two-year fixed rate at 60% LTV - with no fee HSBC 1.89% Fixed to 31/12/2017 None £6,026.64

Difference £1,493.64

"While these low deals look great on paper they are often accompanied by high fees that can scare even the most seasoned borrower," said Charlotte Nelson, finance expert at Moneyfacts. "With fees on mortgages ranging from nothing all the way up to £2,794 – and the average mortgage fee sitting at £939 today – it is easy to see why it can be a costly mistake to opt for the wrong deal.

"The low-rate/high-fee combo favours those borrowers looking to purchase properties at the high end of the housing ladder. However, large fees can turn what appears to be a cheap deal into a costly one for the majority. For example, opting for the lowest two-year fee-free fixed rate mortgage at 60% loan-to-value (LTV) will mean borrowers will be around £1,500 better off in the first year than if they'd chosen the deal that boasts the lowest headline rate overall in that sector. The same pattern can be seen at other LTVs, too."

Don't be tricked

It may seem counterintuitive, but opting for the lowest rate doesn't always equal the best deal, particularly if you add on the cost of the fee to the mortgage balance. Those taking out shorter-term deals will need to be especially wary, as Charlotte explains:

"Borrowers choosing a two-year fixed rate will find the size of the arrangement fee particularly important, as the short-term nature of the deal means that borrowers will have to remortgage relatively soon and could pay yet another pricey fee. It can often be a torturous process looking for a mortgage as there are so many costs affecting the overall price, but borrowers need to avoid being swayed by a low headline rate and instead should work out the true cost of the loan.

"There are deals out there with no arrangement fees, so borrowers will have to decide whether they choose a trick or a treat when they come to choose a mortgage."

Remember, in order to secure a mortgage, credit card or personal loan you need to have a good credit rating. To find out if yours has a clean bill of health, contact a credit check provider, such as Experian CreditExpert to investigate your credit report.

What next?

Compare mortgages (looking at the fees as well as rate!)

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.