Shopping around for a cheaper home loan is always a good idea. However, it's important to look beyond headline rates, because other fees are rising rapidly!
One of the best ways to cut your household expenses is to find a cheaper mortgage.
By demanding a better deal from your existing mortgage lender or switching to one of its rivals, it's not difficult to knock two percentage points off your interest rate. Which would you rather pay: your lender's bog-standard variable rate of, say, 6.75% a year or less than 4.75% for a Best Buy discounted- or fixed-rate deal?
What's more, with around 150 lenders actively competing for UK mortgage business (and around 8,000 different home loans), competition for borrowers is fierce! That's why it's crucial to look beyond headline rates when you're comparing deals. Otherwise, you'll miss some important information.
For example, according to mortgage broker Charcol, arrangement fees for Best Buy mortgages have soared since last summer. In July 2004, the average arrangement fee was £339*. By the start of 2005, this had increased to £480 a rise of £141, or 42%. Yikes!
* Based on the average arrangement fee charged by the best two-, three- and five-year fixed-rate deals and two-, three- and five-year discount or tracker rates.
High fees often make deals much less attractive, particularly to borrowers with small home loans. For example, a £500 fee on a £50,000 mortgage costs the same as a 1% interest-rate hike for a whole year.
What's blindingly obvious is that leading lenders are reducing their interest rates to get into the Best Buy tables, while hiking their one-off fees to compensate. So, it's a trade-off: you may pay a lower rate, but also a higher upfront fee, which usually only benefits borrowers with larger mortgages.
Given the huge range of interest rates, fees and features on offer, it's mind-bogglingly difficult to compare deals accurately. So, ignore the glitzy advertising and make sure that you've added up all the elements of each deal. Here's a handy checklist to help you to do this:
Add up the following costs before choosing a mortgage
Monthly costs
- Interest and capital repayments (this is your biggest expense)
- Premiums for savings plans (for interest-only mortgages)
- Premiums for compulsory insurance policies (being tied to over-priced policies is always a bad idea, so shop around!).
One-off fees
- Legal fee
- Survey or valuation fee
- Mortgage indemnity premium (usually not charged if you have a 10% deposit)
- Application and booking fees
- Arrangement and completion fees
- Broker fee (Charcol charges a whopping 1.5%, which is waived if you apply online)
- Exit fee (particularly the dreaded extended redemption penalty!)
- Sealing and deeds fees (charged when you switch lender or pay off your loan).
Add up all these expenses over the term of your special-rate deal, say, three years, and then deduct any incentives or cashback received. The loan with the lowest total will usually be your best option. Alternatively, there are several reputable no-fee mortgage brokers that will do all the hard work for you, plus online mortgage-search engines that make choosing a new home loan a doddle!
So, if you can save money by switching your mortgage, what's stopping you? With most borrowers saving at least a grand a year by shopping around, it's a great way to earn fat-cat returns!
More: Check out the deals in our Mortgage centre | Find cheaper life and home insurance.
