Are the lowest mortgage rates the best deals?
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The last few months have seen mortgage rates fall to record lows with deals now* offering rates from as little as 0.84%. These headline-grabbing low rates can be tempting, especially at a time when many are worried about rising inflation and are looking to reduce their monthly outgoings as a result, but they may not be the most cost-effective deals.
When it comes to looking at mortgage deals, rates are just one factor that will impact the overall cost of the mortgage. A low rate will help to reduce the monthly repayments, but mortgage lenders can add extra charges and fees to the deal that makes the initial rate not as attractive as it first seems.
One fee that can significantly impact the cost of a mortgage deal is the product fee. Some deals can charge over £1,000 in product fees, while others may not charge a fee at all. How the product fee is paid can vary according to the mortgage chosen. Some lenders will require the product fee to be paid upfront. In other cases a product fee can be added to the cost of the mortgage over its term. If a fee is added to the mortgage advance, borrowers will have to make slightly higher monthly repayments compared to a deal charging the same rate with no fee and will have interest added to the outstanding fee. As such, if possible, it may be worthwhile borrowers paying the fee up front to avoid additional interest. Where lenders charge a booking fee, these always require an upfront payment.
Another factor that can significantly increase the cost of the mortgage is whether or not the deal comes with incentives. Some deals, particularly remortgage deals, will come with the incentive of a free valuation and no legal fees. Paying for valuations and legal fees can add hundreds of pounds to a remortgage and even more for those looking to purchase a new home. As such, a mortgage that offers these incentives could save borrowers hundreds, sometimes thousands, of pounds in additional mortgage costs.
When comparing mortgage deals, borrowers often fail to take into account that over the term of the deal their circumstances may change. For example, a pay rise or inheritance may mean that the borrower can increase their mortgage repayments or make a large lump sum repayment. Although borrowers may expect their mortgage lender to welcome additional or higher repayments, lenders may, in fact, charge borrowers for making additional or increasing repayments. Instead, borrowers who believe that they may be able to increase their mortgage repayments should look for deals that allow this without charging extra fees.
Clearly, when comparing mortgage deals the rate is just one aspect of the deal that borrowers should consider. This is why it may be worthwhile speaking to a mortgage broker when looking for a new mortgage deal or a remortgage. A qualified broker should have the experience and knowledge about the different types of deals available and which will suit the borrower’s individual circumstances, making it easier for the mortgage borrower to choose the best deal for them.
*Correct on 25 August 2021
Derin Clark is an Online Reporter at moneyfacts.co.uk, the money comparison experts, specialising in personal finance.