How To Measure Up Mortgages

By Cliff D'Arcy | 11 June 2003

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There's a great cartoon in this week's Private Eye. It shows a man in a telephone box calling the "Adult Fantasies" chatline to confess, "I'd like to own my own home" (!)

As things stand today, about two-thirds of homes in Britain are owner-occupied, and we have around 11.5m mortgages between us. According to the Bank of England, collectively we owe £700b to mortgage lenders ouch!

So, you'd think that we'd all do our best to keep our mortgage bills down, wouldn't you? Unfortunately, inertia (a marketing term for laziness) and the fact that there are over 7,000 different home loans out there means we are paying billions more than we should.

I guesstimate that we could save up to 2%, or £14b a year, if we all shopped around for better home loans. Here's a simple way to inspect mortgages and figure out their total cost.

For the period we've chosen, we need to add up:

Monthly costs

1. Monthly mortgage repayments over the period (interest and capital repayments)
2. Monthly payments for savings plans (for interest-only mortgages) *
3. Monthly premiums for mortgage protection policies (vital to protect partners or families) *
4. Monthly premiums for mortgage payment protection policies (but this cover can be expensive) *
5. Monthly premiums for home insurance policies. *

* Naturally, if mortgage lenders don't tie us in for (2) to (5), we shop around for the best deals, as lenders are notoriously expensive when it comes to mortgage-linked products.

One-off costs

1. Legal (conveyancing) fees
2. Arrangement fees (also known as application or booking fees)
3. Valuation (survey) fees
4. Mortgage indemnity guarantee (MIP) premium (these are nasty, we avoid them where we can)
5. Sealing and deeds fees (payable when we pay off our loans or switch to other lenders)

Also, we should take note of any redemption penalties (fines for settling the mortgage early). If these are severe, we might want to keep looking.

Finally, we take off any incentives the lender gives us, including any upfront cashback.

So, here's an example, loosely based on a mortgage deal out there right now:

Repayment mortgage of £100,000 over 25 years, with an interest rate of 3.6% for three years and no redemption penalty thereafter.

Example monthly repayments (using this mortgage calculator) of £506 for three years = £18,216. We're free to shop around for (3) to (5), so we won't factor these into this calculation.

Example one-off costs: legal fee of £250 + arrangement fee of £300 + valuation fee of £250 + no MIP + sealing and deeds fees of £150 cashback of £250 = £700.

Total = 18,216 + 700 = £18,916 over three years.

So, our goal is to choose the mortgage with the lowest total over our chosen time period. Once our three years is up, we scout around for the best deal and re-mortgage again, if necessary.

So, what's stopping you? If you can move your mortgage without severe penalties, get looking for a better home loan today and claim your share of our wasted billions!

More: Check out the bargains in our Mortgage Centre | How To Choose A Mortgage | You Decide Which Mortgage Is Best