While interest rates on many mortgages are at an historic low, arrangement fees have rocketed in the last two years and our analysis of around 2,800 mortgages finds that only 19% of mortgage deals are now available without any set-up fees.
So it’s more important than ever to understand the total cost of a mortgage - yet new Which? research reveals that many consumers can’t spot the best deals.
Mortgage deals on test
We asked 1,001 homeowners and home-buyers to rank five, two-year fixed-rate mortgages in order of total cost over the two years, including monthly repayment charges and arrangement fees, based on borrowing £100,000.
Only five people (0.5%) correctly ranked all five mortgage deals in the correct order, and just a quarter (27%) could identify the cheapest and most expensive deals, despite half (49%) saying they found the test easy.
Only three in ten (30%) people who have remortgaged, and a quarter (25%) of people who had bought their first home in the past five years, correctly ranked the cheapest and most expensive mortgages, compared with one in five (22%) potential home-buyers.
How to find the best mortgage deals
Comparing mortgages based on interest rates alone may not give an overall indication of the best deal for you because it does not reflect the overall cost of a mortgage.
Depending on how much you plan to borrow and the length of the deal, some people may be better off choosing a mortgage with low set-up fees and a higher interest rate. Find out which type of mortgage deal is right for you with the help of our guide.
Yet, in a separate survey, just three in ten (29%) people who took out a mortgage recently said the total cost is important – compared to half (52%) who said the headline interest rate was important.
Mortgage lenders urged to display total mortgage costs clearly
Which? wants all lenders to display the total cost of mortgages clearly to make it easier for consumers to compare and for the industry to explore alternatives to APR in the mortgage market.
Responding to research released today by Which? into confusion over the cost of mortgages, Head of member and external relations, Sue Anderson has said:
“The mortgage process includes a number of checks and balances to try to ensure that consumers understand the whole picture of the rate, fees, charges, and total costs and characteristics of the mortgage they eventually choose. The compulsory key facts illustration (KFI) sets these out in detail, based on the customer’s individual circumstances, and consumers can obtain as many different KFIs on different mortgage deals as they want to before deciding which to apply for.
Consumers do not, in real life, have to make their choices based on the very limited information that Which? used to gauge consumer awareness and capability to decide on which loan represented the cheapest option.
The more important issue that the Which? data reveals is the limitations of the APR. Although the APR is a useful tool, it cannot be used in isolation from the other important disclosures about cost. Which? asked consumers to rate the deals on offer only for cost over the period of the special deal; the APR, on the other hand, is designed as a comparison tool for the long-term cost of the mortgage.
Some time ago the CML published research on the concept of a more “dynamic” APR – see here"
Which? executive director Richard Lloyd said:
'While it's good to see lenders now offering lower interest rates, mortgage arrangement fees have risen dramatically in the last two years making it increasingly important for borrowers to understand the overall cost. Our research shows that even people who already have a mortgage struggle to recognise the cheapest deal.
'Lenders should be more transparent about the true cost of mortgages so that borrowers can more easily compare deals and find the best one for them.'
Mortgage fees - what to watch out for.
Even after you have taken out a mortgage, you can still face a range of charges from storing house deeds to fees for being in arrears or even for overpaying.
Mortgage fees can vary widely depending on the lender. For example, Ipswich Building Society charges £35 for a bounced cheque or failed direct debit, whereas Norwich and Peterborough Building Society charges just £5 and £2 respectively.
And a quarter (27%) of lenders charge no admin fees when closing down a mortgage, whereas some will charge up to £195 to send you the deeds.
We want to see more transparency around post-sale fees and for charges and penalties to reflect lenders' actual costs.
We also want reassurance from the lenders that fees reflect the true cost to lenders; there is no clear sign that set-up costs have increased for lenders but arrangement fees have spiralled in the past years. Increasing arrangement fees not only makes it more expensive to switch but can damage competition.
