Personal Finance: Getting the best mortgage deal

Borrowers taking out mortgages with the cheapest headline rates are being charged hefty fees that can send the total cost of their loan soaring, new research shows.

Looking for your property is just the first step - often looking for the right mortgage deal can prove even more complex. Picture: Ian Rutherford

Lenders are cashing in on high demand for mortgages by luring borrowers into taking out seemingly low-cost deals that in reality are more expensive than those with higher rates.

It means that borrowers are now being squeezed from both sides, as mortgage rates edge up in the wake of the Bank of England’s recent warning of a possible base rate hike before the end of the year.

The biggest fees are typically on the market-leading rates available to borrowers with larger deposits, according to analysis by MoneySuperMarket.

It cited the example of a two-year fixed-rate deal from HSBC for borrowers with 40 per cent to deposit. While at first glance the 1.59 per cent interest rate makes it the cheapest available, it comes with a combined booking and arrangement fee of £1,999.

On a £150,000 mortgage the repayment on the two-year term would amount to nearly £17,000, when costs are factored in.

Yet the same borrower taking out the Post Office’s two-year fixed-rate of 1.98 per cent for those with a deposit of 25 per cent would actually pay less. With an arrangement fee of £995 the total repayment over two years would come to just £16,211.

The HSBC offer, seemingly the best for those with large deposits, is also trumped by Cumberland Building Society’s two-year fix for those with 30 per cent to put down. The deal has a headline rate of 2.08 per cent, significantly above that charged by HSBC. But its £699 fee means the total cost over two years is just £16,107, more than £400 cheaper than the HSBC deal.

The examples underline the importance to borrowers of looking beyond the headline rate and comparing costs too.

Clare Francis, editor-in-chief at MoneySuperMarket.com, said: “The only way to work out which is the best mortgage for you is to calculate the total amount you’ll pay – monthly payments and arrangement fees – over the term of the deal. It is well worth taking the time to do whenever you are looking for a new mortgage as it could save you hundreds of pounds.”

Comparing mortgages is made harder by the sheer range of fees that can be charged, from the set-up stage to early repayment penalties. Most lenders now have more than 20 additional fees they can charge, with several “boasting” almost 30 types of fee.

But borrowers often want the cheapest monthly payments regardless of the fee, said Alison Mitchell, mortgage expert at Edinburgh IFA Robson Macintosh.

“I always work out the true cost by taking the difference in monthly payment, multiplying this by the number of months the product is in force for and subtracting the cost. i.e the fee,” she said.

“We can then see which product works out cheaper overall. This is always different dependent on mortgage amount, term of product and fee structure.”

The biggest single charge is usually the arrangement or completion fee. These have been rising for some time and can vary enormously between different lenders.

“The majority of lenders offer a two fee option – either high fee and lower rate, or low fee and higher rate,” said David Rolleston, director of Mortgage Advice Brokerage in Glasgow.

“It all boils down to exactly what is on offer and the mortgage amount as to which offers the best value for money. That is why it’s important to seek independent advice because there are likely to be other factors to consider when deciding on which product will be most appropriate for your circumstances.”

The importance of checking fees will grow as mortgage costs increase. A number of lenders have taken their cheapest deals off the market since the Bank of England indicated in June that interest rates could rise sooner than previously anticipated.

HSBC was the most recent of the big high street banks to raise the cost of some of its cheaper deals, but taxpayer-backed Royal Bank of Scotland and subsidiary NatWest lead the way in terms of the number of rate cuts over the last 12 months.

The latter has cut its rates 21 times in the past year and RBS has done so on 13 occasions, according to analysis by Moneyfacts and savingschampion.co.uk