Here's what you need to look at when searching for the cheapest deal.
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The mortgage market can be a bewildering place and even though the last 12 months has seen the number of available mortgages drop significantly, it’s not become any easier to sort the wheat from the chaff.
Lenders use different pricing mechanisms when designing their products and you need to take them all into account to decide on the right deal. This is why you should be sceptical when looking at best buy tables which often favour rate above other criteria.
To find the cheapest mortgage, there are three key areas that you should look at to work out whether a deal is suitable and competitive – the rate, the fee and the loan-to-value ratio (LTV).
The Rate
The lower the interest rate the lower your monthly repayments, so just go for the lowest rate you can find, right?
Wrong.
Lenders make products look appealing by giving them low headline rates that attract our attention. But when you get under the skin of a product it can be far less appealing.
The headline rate can be extremely short-term. It’s no good finding a deal at 3.49% only to discover that it finishes after six months and then you are tied into the lender’s standard variable rate of 7.99% for one and a half years. Over the two-year period a rate of 6.95% would actually cost you about the same.
The Fee
It is more common than ever for lenders to offer temptingly low rates with whopping great arrangement fees. This helps disguise the fact that the total cost over say a two-year period is actually higher than the rate suggests.
But let’s not be too harsh on lenders. Offering high-fee deals provides borrowers with more choice, and most large lenders also offer low-fee options at higher rates for borrowers to decide what suits them best.
The high-fee, low-rate deals tend to suit larger loan borrowers better as they gain maximum benefits from a few percentage points off their interest rate. But borrowers with modest mortgages of less than £250,000 should look long and hard at fees, as they can make a massive difference to overall cost.
For example, HSBC’s two-year discounted rate of 4.99% comes with a fee of £2,499. Monthly payments on a modest £150,000 deal are £876, which totals £21,024 over 24 months. Add the fee and you have spent £23,523 over the discounted period.
The lender also offers a higher rate of 5.69% with a lower fee of £249. Repayments are £938 a month and £22,512 over two years, but when you add on the fee the overall cost is actually lower with this deal, amounting to £22,761.
Always look at the total cost of your deal including fees over the period you are tied in for. (You can now calculate this total cost using our nifty new remortgaging calculator.)
The LTV
A distinguishing factor of the mortgage market in 2008 is the huge shift in LTV tiers. The loan-to-value ratio is the proportion of the property’s value you are borrowing as a mortgage.
If you have a £10,000 deposit and want to buy a house at £100,000, you need a 90% LTV deal. This deal is fairly high risk for the lender in today’s falling property market. After all, if prices fall by more than 10% and the lender has to repossess your home, it won’t get all of its money back. Since this is the lender’s primary concern, it will charge you more for a 90% LTV deal than it would in last year’s rising property market.
By contrast, a borrower who only needs to borrow 60% of the value of their home is seen as lower risk and will be charged less.
So, when you’re shopping around for a good mortgage deal, you’ll find the LTV is more important than it used to be. There are now many LTV tiers in place, each with a different rate and the most competitive deals are now reserved for those with 40% equity/deposit upfront. Those with a 10% deposit will face the most expensive rates.
For example Woolwich currently has a market-leading lifetime tracker of 5.69%, available up to 60% loan to value. If you need to borrow 90% LTV the rate shoots up to 6.59%.
On a £200,000 mortgage this would mean monthly payments of £1,250 on the low rate and £1,361 on the higher rate – a difference of £111 each and every month.
When you look at any advertised mortgage rate it is probably quoted at the lowest LTV ratio, which will be between 50% and 75%. The rate applicable to those with a deposit below 25% of the property’s value will usually be higher.
Mortgage Checklist
There are other criteria you should look out for when trying to spot a good mortgage. Ask all of the questions below before making a decision:
• Availability? Is it open to remortgagors-only or all borrowers? On an interest-only and repayment basis? With minimum and maximum levels of borrowing?
• Costs? Find out the exit fee, early repayment charges, higher lending charge and other fees.
• Benefits? Does it have flexible features, such as the ability to overpay, and what are the limits on this?
More: Eight Amazing Offset Mortgage Deals
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