Mortgages are more complicated than ever making it difficult for consumers to compare total costs and find the best deal.
Despite mortgage interest rates hitting a historic low, arrangement fees have sky-rocketed in the past two years, according to research from Which?
In research by the consumer group, 99.5% of homeowners and homebuyers struggled to identify the total cost of a mortgage deal. While those 1,001 surveyed were able to rank the best deals by interest rate (APR), they were thrown by how arrangement fees can alter the overall cost of a loan.
Comparing mortgages based on interest rates alone can be misleading as it doesn't 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.
Yet seems lenders are preying on this misunderstanding by luring consumers with attractively low rates, only to hit them with set-up fess of up to £2,000.
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.
Previous research from Which? found that mortgage lenders are charging customers 39 different types of fee. These include anything from booking and valuation fees to charging for falling into arrears, for changing from interest-only to repayment and even for choosing to take out buildings insurance with someone other than your mortgage provider.
The size of these 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 of lenders charge no admin fees when closing down a mortgage, whereas some will charge up to £195 to send you the deeds.
Don't get caught out
The myriad of mortgage fees is undoubtedly confusing so try to get your head around them with these top tips.
- Research - Understanding how much your mortgage is going to cost is of utmost importance – both month-to-month and over the lifetime of the deal. Taking time to learn financial jargon terms will help you to understand how to best compare mortgages.
- Speak to an adviser - Mortgage brokers can help you to find the best deal on the market for you when all additional costs are included. Look out for one that is 'whole or market' rather than tied to one particular lender or limited panel of providers.
- Read the small print - Like all financial services, the charges and caveats will be hidden in the small print. Make sure you're thorough when reading through documents, and highlight any fees to make them easier to spot and compare.
- Look beyond headline rate - Financial products are always be advertised by their headline rate with the goal to draw you in. Take a look but be sure investigate all other costs to weigh up the overall cost as the deal may not be as good as it first seems.
- Question fees - Some fees are unavoidable but don't think you can't question additional costs when speaking to your mortgage lender. Weigh up whether the deal still makes financial sense and whether there is another viable option.