Mortgage borrowers: Beware high fees sweetened by low headline rates

28th July 2014


Mortgage borrowers are being warned against choosing a mortgage based on the ‘headline’ interest rate alone as the true cost of the lowest-rate deals maybe much more pricey than they first appear.

An analysis from comparison site MoneySuperMarket found that many deals boasting market-leading rates can also come loaded with high fees.

For example, the lowest fixed rate mortgage is a two-year deal from HSBC at 1.59%, available to those with a deposit of 40% or more. However, it has a combined booking and arrangement fee of £1,999.

Over the two-year fixed term someone borrowing £150,000 over 25 years, would repay a total of £16,543 (including the set-up costs). By comparison, the leading two-year fix available for loans up to 75% of the property’s value, is from the Post Office. It has a higher rate of 1.98% but the arrangement fee is much lower at £995, and it actually works out cheaper: the total amount that would be paid back over the two years is £16,211 – a saving of £332.

Even better value, said MoneySuperMarket, is Cumberland Building Society’s 70% two-year fix, which has a rate of 2.08% but the fee is just £699, meaning the true cost over two years for someone borrowing £150,000 is  £16,107 – £436 cheaper than the HSBC mortgage.

Clare Francis, at MoneySuperMarket said: “When comparing mortgages, it’s crucial to factor in the fee and not just go for the product with the lowest rate as the set-up costs can significantly impact the overall value. In some cases it can be worth paying a high fee in order to secure the lowest possible rate but this depends on the amount you are looking to borrow – the larger the loan, the less of an impact the fee has.

MoneySuperMarket's Clare Francis

MoneySuperMarket’s Clare Francis

“The only way to work out what is the best mortgage for you is to calculate the total amount you’ll pay – monthly payments and arrangement fees – over the term of the deal. It is well worth taking the time to do whenever you are looking for a new mortgage as it could save you hundreds of pounds.”

In the main over recent years, the most competitive mortgage deals have only been available to those with large deposits – in many cases borrowers needed to have at least 40% to put down. However, MoneySupermarket’s research concluded that this trend seems to be changing – as those with smaller deposits now have access to some great mortgage deals. Francis added: “That said, those with big deposits are still being enticed by ultra-low rates, but huge arrangement fees mean that seemingly cheap mortgages are not always quite as good as they appear to be.”

Based on £150,000 mortgage, taken over 25 years on a repayment basis
Lender Pay Rate Rate Type Period Max LTV Arr/Bkg Fee  ERC   True Cost over 2 Years
Cumberland BS  2.08% Fixed  01.09.2016 70% £699 2 Years    £16,107
Post Office  1.98% Fixed  31.08.2016 75% £995 2 Years    £16,211
HSBC  1.59% Fixed  30.09.2016 60% £1,999 2 Years    £16,543
HSBC  2.19% Fixed  30.09.2016 70% £999 2 Years    £16,599
Lloyds Bank  1.74% Fixed  30.11.2016 60% £2,260 2 Years    £17,068
Halifax  1.84% Fixed  30.11.2016 60% £2,260 2 Years    £17,236
Sourced by 11.07.2014

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