Moneysupermarket.com editor Clare Francis questions mortgage expert Louise Cuming on what to look out for before taking out a mortgage...
Video Transcript
Clare Francis:
Finding the best mortgage is becoming more and more complicated. It's not just a question of deciding whether you want a fixed rate or a variable rate, deciding how long you want to be tied in for, and then looking for the lowest rate you can find. Fees are becoming an increasingly important factor that needs taking into consideration in order to determine what's the best deal for you.
The average arrangement fee has jumped from about £450 two years ago to around a £1,000 now, but you could pay significantly more. Some products have percentage based fees of up to 3.5% which means that someone looking to borrow £500,000 would have to pay £17,500 just to set the loan up. Other deals have high, flat rate fees - a fee of £2,000 is no longer uncommon - while some products have no upfront fees whatsoever.
So with such a mind-boggling array of products to choose from, how on earth are you meant to work out which is the best mortgage for you? Louise Cuming, head of mortgages at moneysupermarket.com, is here to help us find out.
Q1 - Louise, when people are looking for a mortgage, most of the time they are going to go for the lowest rate they can find - is this the wrong thing to do?
Louise Cuming:
I think it is, because really the rate is only one element as you've already outlined. Fees are becoming a much bigger part of the choice, as is your own individual circumstances, and indeed the amount of time you are locked into the product. So, there are all sorts of things to take into consideration.
Q2 - But if you've decided, for example, that you wanted to go for a two-year fix and there are two products - maybe one's got a rate that's 1% higher than the other, but the higher rate has no fee at all and the others got a £2,000 fee - how do you work out whether or not you're best paying the high fee and going for the lower rate, or vice versa? Do you really have to sit down with the spreadsheet and the calculator and do the sums, or are there any shortcuts and general rules of thumb which may steer you in the right direction?
Louise Cuming:
Well, I mean ostensibly it seems like you've got to be a mathematician to choose the right mortgage now, and ideally you sit down and work out how much it's going to cost over the period. But from a high level point of view, it tends to be that if you're wanting to borrow a substantial amount, say over £200,000, then a flat fee will probably be all right; whereas if you're borrowing a lower amount, say below £100,000, then you could consider a percentage fee.
Q3 - Most lenders will now let you add the fee to the cost of the loan, is this not a good way around the high, upfront set-up costs?
Louise Cuming:
Certainly it seems like a good way around, because by adding the fee it probably only adds a little bit to the amount you're paying every month. Financially it is a bad choice because by adding the fee you attract interest, and that interest will ramp up over the term of years that you're taking your mortgage over. So suddenly that £2,000 fee could turn into £4,000, £5,000 or £6,000 over a period of years.
Q4 - Finally is there anything else that people should bear in mind when their trying to find what sort out their trying to sort out what is the best mortgage deal for them?
Louise Cuming:
Looking for mortgages as far as I am concerned is really like looking for clothes: what suits and fits one person won't necessarily suit another person, and there are literally thousands of products out there. So really, high level you need to look at the amount you can afford to pay back, you need to take fees into consideration, but most important is to make sure you can afford the product that you choose, that it fits your individual circumstances, and that you're comfortable with the lender. After all, there are thousands of products to choose from and there will be one to suit you.
Clare Francis:
Mortgage payments form the largest monthly outgoing for most people so it really is worth spending some time to ensure you are getting the right deal for your circumstances, because if you choose the wrong loan it could end up costing you thousands more over the term of the deal.
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