MORTGAGE deals with low-interest rates could actually cost you more as lenders “quietly” hike other fees.
The average fee charged on a fixed-rate mortgage rose by £57 year-on-year to hit £1,075 this month, according to research by comparison site Moneyfacts.
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It comes as banks and building societies have engaged in a price war on mortgages that’s pushed interest rates below 1% to cash in on the current housing boom.
While these deals appear attractive at first, experts have warned that low rates can come with high product fees that can actually cost homebuyers more in the long run.
David Hollingworth, associate manager at L&C Mortgages said the fact the market is extremely competitive at the moment is “good news for borrowers”.
But he added: “As lenders try to push rates even lower they will sometimes use higher fees to drive down the headline rate.
What help is out there for first-time buyers?
GETTING on the property ladder can feel like a daunting task but there are schemes out there to help first-time buyers have their own home.
Help to Buy Isa – It’s a tax-free savings account where for every £200 you save, the Government will add an extra £50. But there’s a maximum limit of £3,000 which is paid to your solicitor when you move. These accounts have now closed to new applicants but those who already hold one have until November 2029 to use it.
Help to Buy equity loan – The Government will lend you up to 20% of the home’s value – or 40% in London – after you’ve put down a 5% deposit. The loan is on top of a normal mortgage but it can only be used to buy a new build property.
Lifetime Isa – This is another Government scheme that gives anyone aged 18 to 39 the chance to save tax-free and get a bonus of up to £32,000 towards their first home. You can save up to £4,000 a year and the Government will add 25% on top.
Shared ownership – Co-owning with a housing association means you can buy a part of the property and pay rent on the remaining amount. You can buy anything from 25% to 75% of the property but you’re restricted to specific ones.
Mortgage guarantee scheme – The scheme opens to new 95% mortgages from April 19 2021. Applicants can buy their first home with a 5% deposit, it’s eligible for homes up to £600,000.
“That has seen some new deals hitting new lows but carrying fees that can amount to around £1500.”
But he added many homebuyers should not be drawn in soley by the headline low interest rate.
For example, you can save almost £1,000 over two years on a 60% mortgage of £200,000 over 25 years by choosing a higher interest-rate mortgage that comes without fees.
With HSBC’s two-year fixed-rate deal that has a low interest rate of 0.99%, you pay an average booking fee of £999.
While this works out as a smaller monthly payment of £752.84, it comes to a total of £19,067.16 over the two years when you include the hefty £999 fee.
On the other hand, you pay more monthly at £775.67 with HSBC’s two-year fixed-term deal with a higher 1.24% interest that comes with no additional fee.
But the total you’d pay over the two years comes to £18,616.13, saving you a decent £415.03.
The same applies to the two-year fixed-rate deal from Nationwide Building Society, which comes with a low interest rate of 0.99% but an average £1,499 reservation fee.
This works out again to a smaller payment of £752.84 but over two years comes to £19,567.16.
How do you find the best mortgage deals?
WE explain how to ensure you get the best deal on your mortgage or remortgage:
Websites such as MoneySuperMarket and Moneyfacts have mortgage sections so you can compare costs. All the banks and building societies will have their offers available on their sites too.
If you’re getting confused by all the deals on the market, it might be worth you speaking to a mortgage broker, which will help find the best mortgage for you.
A broker will typically cost between £300 and £400 but could help you save thousands over the course of your mortgage.
You’ll also have to decide if you want a fixed-deal where the interest you’re charged is the same for the length of the deal or a variable mortgage, where the amount you pay can change depending on the Bank of England Base Rate.
Remember, that you’ll have to pass the lender’s strict eligibility criteria too, which will include affordability checks, and looking at your credit file.
You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips, passports and bank statement.
So the no-fee higher interest option from HSBC would save you £951.03.
For 95% loan-to-value mortgages – popular with first-time buyers – the picture is similar if you take out £200,000 over 25 years.
A two-year fixed 95% mortgage from HSBC with a 3.59% interest rate comes with an average booking fee of £999.
The average buyer would be paying £1,010.93 a month, bringing the total they’d pay over two years to £25, 261.25, including the fee.
On the other hand, if you go for the Nationwide Building Society two-year fixed 95% mortgage with an interest rate of 3.64% but no fee, you’ll pay slightly more with an average of £1016.33 a month.
But this comes to a total of £23,891.84 over two years after you’ve received the £500 cashback that comes with the deal.
As a result, you’ll save £1,369.41 if you choose the deal with the higher interest rate and no fee.
The above deals can be secured directly from the banks rather just than through a mortgage broker and have no local restrictions so are available across the UK.
It’s important to note that these figures include the average fees and don’t represent a standard monthly payment.
Homebuyers should always research mortgages that are best suited to theit indicidual situation.
Ultimately, it’s always worth comparing different deals and shopping around rather than going for a mortgage based on low-interest rates alone.
“Rate is by no means the whole picture, there are usually additional costs involved that need considering as well as benefits some lenders will have and others will not,” said Chris Sykes, Mortgage Consultant at Private Finance.
Rachel Springall, finance expert at MoneyFacts also warned: “Low rate mortgage deals that grab the headlines look inviting, but it is vital that borrowers compare the overall true cost of any deal, such as the fee and any incentive package to ensure it’s the right choice for them. “
Meanwhile, Robert Payne of Langley House Mortgages, warned that lenders have been dropping rates while quietly upping their arrangement “since the dawn of mortgage debt.”
He said: “Lowering their rates can put a lender at the top of the Best Buy tables despite the fact that the increased arrangement fees many charge have effectively wiped out any benefit for the borrower.
“It’s important borrowers look at the total cost of a mortgage, which includes the arrangement fee as much as the headline interest rate.”
The Sun has contacted HSBC and Nationwide for comment.
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Elsewhere, we’ve rounded up the UK regions where it can be cheaper to buy a home with a 10% deposit than rent.
Meanwhile, the new 5% deposit mortgages have been launched by leading banks including Natwest and Barclays as part of the government’s 95% mortgage scheme.
We explain how to find the best mortgage for you, including lenders offering “no deposit” loans.
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