'I was better off paying a higher interest rate and lower fee': Homebuyers should beware of hidden traps in 'bargain' mortgages

By Richard Dyson, Financial Mail On Sunday

PUBLISHED: 16:26 EST, 20 April 2013 | UPDATED: 03:49 EST, 23 April 2013

The housing market is recovering and there are more mortgages at rock bottom rates than at any time since the start of the financial crisis. But that doesn’t mean that you should take the first decent-looking deal you are offered – there are still plenty of traps for the unwary.

ROCKETING UPFRONT FEES

Exceptionally low mortgage rates – two-year fixed rates of less than two per cent, for instance – are increasingly accompanied by upfront fees that can top £1,000.

This makes it crucial for borrowers to do their sums. Where mortgages are large, the lower rate may work out best. Where smaller loans are concerned it probably won’t.

House hunting: The mortgage market is still far smaller than at the pre-crisis high

Online mortgage calculators can help, but a broker – if you use one – would do the maths for you.

‘Expect to pay a mid-range fee of about £500 to get the best rates if you are a smaller borrower or first-time buyer,’ says Ian McGrail of national broker First Mortgage. ‘If you are being asked to pay a fee of £1,000 or more, you probably need to be borrowing £400,000 or £500,000 for it to work out cheaper.’

More...

David Hollingworth, a mortgage analyst at broker London & Country in Bath, Somerset, says: ‘Now that lenders are actively competing, many are using higher fees to help them offer even lower rates and attract best-buy coverage.

‘Most lenders offer a range of rate and fee combinations. Having a broader choice is good for borrowers, provided they navigate to the best deal for them.’

TOP RATES THAT SUDDENLY VANISH

The mortgage market is still far smaller than at the pre-crisis high and some lenders are merely dipping back into it – offering top rates for brief periods only. Small lenders, including regional building societies, are especially likely to lend only limited amounts.

There’s still hope - even if you don’t fit perfect borrower profile

Older borrowers, those with a poor credit history and those who want to remain on interest-only arrangements are just a few of the ‘not-quite-perfect’ borrower profiles that lenders are still inclined to turn away.

But life is easing slightly. Most lenders will lend to the age of 70 or 75 as standard so a 60-year-old borrower should still qualify, provided they meet other criteria, for a 15-year loan. Mortgage broker Ian McGrail says: ‘It is worth considering smaller lenders and building societies.’

This is because many assess or ‘underwrite’ applications individually, rather than by computer, which could mean a wider range of risks is accepted. McGrail adds: ‘You might have only recently gone self-employed or missed some repayments but you could still be accepted, if the lender is prepared to look at you individually.’

Adrian Anderson of London-based broker Anderson Harris says a characteristic of the market is that ‘lenders have limited tranches of money and that once they run out, the deal will be pulled. You may have to move quickly’.

However, you can ‘book’ a mortgage rate even if you are several months away from completing on either a remortgage or house purchase. Make sure you know – from the lender or your broker – how long the rate will remain held for you and what fees apply.

BROKERS DON'T HAVE EVERY BEST BUY

Some mortgage brokers such as London & Country are free to borrowers because they take commission from the lender. Others, such as John Charcol, charge borrowers.

Reputable brokers like these can be a huge help by selecting and explaining deals and helping with the paperwork.

But some lenders, notably HSBC and its offshoot First Direct, offer keenly priced mortgages only direct to borrowers. For instance, HSBC currently has a seven-year fixed rate of just 3.49 per cent.

Direct-only mortgages became more prominent during the crisis but are now fading, says First Mortgage’s McGrail. ‘We have to be aware of them, but they are less common today,’ he says.

Hollingworth says: ‘We don’t shy away from the fact that there are direct deals and though most of our clients want advice and help processing their mortgage, we can point those who don’t want the service to the lowest rate.’

DO THE SUMS - IT MAY SAVE HUNDREDS ON A FIXED DEAL

Homework: Marie Balfour says it was 'surprisingly simple' to find a good new deal

Say you need a £150,000 mortgage and you have enough equity in the property (at least 30 per cent) to qualify for the best available deals.

You want a fixed rate for two years, and two competitive rates catch your eye. There is a 1.74 per cent deal from Chelsea Building Society (with an upfront fee of £1,675) or an apparently less attractive 2.24 per cent deal from Norwich & Peterborough (upfront fee of just £295). Which would be better?

Broker London & Country number-crunched the two outcomes over two years, including the lenders’ valuation fees and other costs or perks, where applicable.

The total cost – fees, capital repayments and interest – over the two-year period on the Chelsea deal came to £16,717.

The total cost on the higher-rate N&P deal came to £15,778. In other words, you would be better selecting the higher-rate deal.

But say you wanted to borrow £350,000. Here, Chelsea’s deal results in total costs of £36,675 over two years compared with £36,688 with N&P’s. So the higher fee can be worth it for the lower rate – but only where the sum borrowed is sufficiently large.

Marie Balfour, 38, didn’t use a broker when she remortgaged her home in Accrington, Lancashire. Instead she used online searches and calculators to identify attractive rates and work out the monthly and overall costs.

She wanted to borrow less than 60 per cent of the value of her home, which qualified her for the best available loans. ‘I quickly saw some of the lowest rates came with a £999 fee, and I admit I was sad enough to do all the sums,’ she recalls. ‘I could see I’d be better off with a slightly higher rate and lower fee.’

In the end, she chose a two-year fix at 2.89 per cent from Nationwide Building Society, with a £99 fee. Borrowers must have a current account with the society to qualify.

‘I’m aware the market has got easier,’ says Marie, a project manager. ‘But it’s not something I was very clued up about. The information is widely available, and getting a good rate turned out to be surprisingly simple.’

True Cost Mortgage Calculator

This mortgage payment calculator will allow you to see the effect of sneaky arrangement fees on your repayments. Use the second part of the calculator to compare deals.

Add your comments

Comments (25)

The comments below have not been moderated.

View all

Cloud 9... Houses are not overpriced, if they were none would sell. Why is it that most people cannot understand that high prices are because big demand, short supply. Too many people chasing too few houses. Usually called inflation. Easy to solve JUST BUILD MORE HOUSES. Simples.

- Mike , Romsey, 22/4/2013 11:57

Click to rate Rating 4

What about us impoverished savers? It's depressing when you receive your statement and see your savings have only grown by a few hundred rather than by thousands. I might have to start spending some of them to cheer myself up. Maybe a world cruise would do the trick.

- Stu Pidd , Smarter than the ave DM reader, 21/4/2013 23:36

Click to rate Rating 4

This is exactly why people who think that they are "financially savvy" would be better off paying a fee for a professional adviser.

- Richard F , Newcastle, 21/4/2013 23:14

Click to rate Rating 6

Now now you fellows if you hadn't worked out yet why interest is so low let me illuminate you. 10 million people in the USA are retiring EVERY SINGLE WEEEK! The govt and financial institutions cannot afford to pay them So they introduce investment schemes that aren't PPI insurnces that aren't Fees and charges bogus interest on credit cards and debit cards. Now that those have been discovered they decided to lower interest so that those GILTS offer almost nothing for retirees.. When that bubble bursts and it is about to you will see a huge increase in adverts for online share buying with miniscule small print conditions at the end of 365 pages of conditions to keep you in the dark. Next will come huge incentives for reverse mortgages Workfare for over 85s Messrs grabit spendit loseit in Waste Minster will then retire both from PMships and their new Party called UPYOURS BRITAIN.

- IGOTITRIGHTDIDYOU , London, United Kingdom, 21/4/2013 21:41

Click to rate Rating 7

Lower rates with higher fees only benefit people who have to borrow hundreds of thousands

- djs , aberdeen, 21/4/2013 21:35

Click to rate Rating 2

Here is the best offer you will see this week. Mortgage of 95% LTV rate fixed for 25 years interest only or attached to Pension plan or ISA life cover for 125% of loan complete household incomes taken into calculation of affordability. The home you buy is yours outright non payment of mortgage insurance a very affordable 0.5% of the loan Legal and other costs can be added to your loan if required. Any number of borrowers permitted on the loan. No deposit required your Poll Taxes for the first 5 years are included as are your gas electricity petrol allowances for the first year. INTEREST FIXED 25 years 2.14% APR Loan Fee included in loan but payable on application is refundable on acceptance. loan fee 15% of mortgage GRABIT SQUEEZEIT LOSEIT & Co in business since 1979 a Thatcher Emblem of outright honesty in business our hallmark for trust and ethics. your local UKIP offices are just a brick's throw away.

- IGOTITRIGHTDIDYOU , London, United Kingdom, 21/4/2013 21:26

Click to rate Rating 11

When I was offering mortgage services my friends charged a percentage of the loan amount a Verwood solicitor was amazed at me when I decided that the business was far more important than screwing my client out of 2.5% upfront before closing fee. But thats why presumably I never ran around in a Porche Boxter or mazzerati like the Weston brothers of Bournemouth and Poole nor had a twin engined Boston Whaler with 250 cc engines capable of travelling at 35 Knots on Sandbanks beach. Ho Hum the things you miss when you havnt got a gun.

- IGOTITRIGHTDIDYOU , London, United Kingdom, 21/4/2013 21:16

Click to rate Rating 4

A Key Facts Illustration, which must be provided during any mortgage interview/application, clearly states the fees and charges attached to the mortgage and deal that is taken. At no time are these facts hidden. If someone wants to borrow such a large amount of money but is too incompetent to work out how much they will be repaying over the term, surely they should be thinking twice about getting themselves into so much debt, as it is these kind of people that default because they have not got a clue about the responsibility of owning a house. It is not hard to work out, just takes logic to understand.

- helen , Leeds, 21/4/2013 20:21

Click to rate Rating 14

Is there anyone from teens to 30s plus, in this country that is competent at basic maths. I even had a young pup on the phone saying to me the other evening, that my mortgagees may have hidden the pip (whatever it`s called) in my mortgage payments .

- pauly , london, United Kingdom, 21/4/2013 17:51

Click to rate Rating 4

If you're that stupid you can't do a couple simple sums you deserve to pay more. Monthly repayment x number of months + fees = cost over set period. It really is that simple & if people can't work that out this country is doomed.

- SD , Peterborough, 21/4/2013 17:38

Click to rate Rating 24

The views expressed in the contents above are those of our users and do not necessarily reflect the views of MailOnline.