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Avoid this sneaky mortgage trap

By Robert Adungo 05.07.12

Headline rates can be enticing, but often they are masking something else such as high fees. We show you what to watch out for.

Spotting a market-leading mortgage is not difficult - most of them are offered with headline-grabbing rates that are designed to bring borrowers pouring in through the door in order to secure the deal before it’s withdrawn.

But in some cases, these deals mask unsavoury pitfalls such as high product fees and it’s up to you to delve into the small print to find out what you’ll really be paying.

Mortgage fees are often given names such as booking fees, arrangement fees, application fees and completion fees, making it incredibly confusing. Take a look at our section on mortgage fees to get a full breakdown on what they actually mean.

Unreliable rates

Headline rates have recently become an unreliable measure of a mortgage’s affordability because fees for fixed and tracker mortgages have increased by more than 20% since September 2009, warns MoneySupermarket.com.

Analysis by the price comparison site shows the average mortgage fee for a fixed product in September 2009 was £1,039, including a £705 application fee and £334 booking fee. This had changed to £1,084 by June 2012, with the application and booking fee at £812 and £272 respectively.

However, the greatest changes have taken place across tracker products, which now cost £1,277, including a £961 application fee and £316 booking fee. In September 2009, the figure was only £1,019, with the application and booking fee at a more affordable £772 and £247 respectively.

Look beyond

Mortgages with the lowest - and therefore most attractive – headline rates don’t necessarily offer the best value over the term of the deal. Rival products with slightly higher - and therefore less attractive - rates may actually be cheaper in the long run once fees are taken into consideration.

"It’s very easy for borrowers looking for a new mortgage to be attracted by low headline rates; however it is vital to consider the account arrangement and booking fees as part of the overall cost," says Clare Francis, mortgage expert at MoneySupermarket.com.

For example, you can get an eye-pleasing rate of 2.64% with HSBC’s two-year fixed-rate mortgage, which is the lowest at the moment – although you will need a deposit of 40%. However, it comes with a hefty £1,999 fee, meaning it will cost you £18,404.20 over 24 months if you borrow £150,000.

By comparison, if you went for the slightly higher rate of 2.78% offered by Bank of Ireland (providing you have a deposit of 35% or more) and borrowed the same amount of money over the same period, you will save £942.72. The mortgage, which has a £799 fee, would cost £17,461.48. The only issue is this deal is only available if the property is in Northern Ireland.

Working out costs

"Fee costs can vary greatly between providers so taking the time to work out the total amount you have to repay over the term of the offer is essential," advises Ms Francis. "That said, for some people it may be worth paying a high fee in order to benefit from the lowest interest rate."

Paying a higher fee can be particularly beneficial if you have a large mortgage as the fee will make up a small percentage of the overall amount being borrowed and the low rate will mean the monthly payments are cheaper.

"However, with smaller mortgages, where a high fee will form a larger proportion of the overall loan size, it may work out cheaper to keep the set up costs low even if it means paying a slightly higher monthly payment," adds Ms Francis.

To get a clear picture of what exactly a mortgage is going to cost you, you need to take every factor into consideration - looking at everything from interest rates and fees through to the length of the deal and monthly cost.

You can use our product tables to identify and compare the range of mortgage deals available to you. Our mortgage calculator will help you work out how much a mortgage will cost you each month. To calculate the total amount you will pay over the entire length of the mortgage, multiply the monthly payments by the length of the deal. So if you had a two-year fixed-rate  mortgage, multiply the monthly payments by 24 and then add on the fees for the total cost.

Don’t add the fee to your mortgage

No matter how much the fee will cost you, avoid adding it to your mortgage itself as you’ll end up paying interest on it, making it more expensive. Paying 3% on a fee of £1,999 would cost you more than £2,800 over a 25-year mortgage term. Even if the fee was £500, it would still set you back £711 in total.

Pay the fee upfront if you can but if you can’t, use a 0% purchases credit card instead. The Tesco Clubcard Credit Card offers 16 months interest-free on spending, giving you more than a year to pay off your debt without worrying about the interest stacking up.

  1. Quick tips

  2. As well as looking at the interest rate, always check how much you’ll have to pay in fees
  3. As a general rule of thumb, the lower the interest rate, the higher the mortgage fee will be
  4. Don’t add these fees to your mortgage as you’ll pay interest on them
Speak to a mortgage broker, especially if borrowing for the first time - they can help get the best product for you
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