How to choose the best mortgage

How do you pick the best mortgage - is it the one with the lowest rate? Are you sure?

Clare Francis: Did you know that the mortgage with the lowest rate may not actually prove to be the cheapest option? The reason for this is that the fees you’ll be charged to set up a mortgage can have a major impact on the total cost of that deal. What does this mean? Let’s take a look.

Most mortgage products charge an arrangement or booking fee. This could be as little as £99, but it could be thousands of pounds. Therefore it’s vital that you don’t get blinded by the headline rate and also look at the fee when you’re looking for a mortgage.

You may find that it actually works out cheaper to go for a higher rate if the set up costs are lower than another mortgage deal with lower rate but higher fee. However, to complicate matters, for some people it will be worth paying a high fee in order to secure the lowest rate possible. This will all depend on the amount you’re looking to borrow.

Generally speaking, a high fee can be worth paying if you’re taking out a large mortgage – we’re talking hundreds of thousands of pounds – as this example illustrates.

But those with smaller mortgages will often find that a higher rate with a lower fee proves to be better value.

Unfortunately, in order to identify the best value mortgage for your needs, you will need to crunch some numbers to work out the total cost over the introductory term. So if you looking for a two-year fix, you need to compare the total cost – monthly payments plus any fees – over two years.

There are a number of online calculators which can do this for you. Alternatively, an independent mortgage broker will be able to help.

However, as a word of caution, watch out for percentage fees. Most arrangement charges are flat fees, but some products levy a percentage fee so the amount you’ll be charged will be a percentage of the amount you’re looking to borrow. These rarely prove to be best value.

For example, on a £100,000 mortgage a 1.5% arrangement fee means you’ll have to pay £1,500 just to take the loan out.

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