The True Cost Of Your Mortgage

It isn't possible to compare mortgages based on rate alone as fees can make all the difference to the overall cost. Here's how you can work out the true cost of your mortgage.

By Rebecca Atkinson

Finding A Deal

Unlike savings accounts and credit cards, comparing mortgage deals by looking at rate alone simply is not good enough. If you buy a mortgage through an independent broker, they will look at a variety of factors - including your personal circumstances and even the type of property you intend to buy - to select the right loan for you.

When you are comparing products yourself online, don't be tempted to scroll down the list of lenders looking for the one with the lowest headline rate. Apart from the fact that different lenders use different criteria to select (and reject) borrowers, there are a number of expenses to take into account that can significantly add to the total cost of a mortgage.

You need to compare all the charges as well as the interest rates on offer to find the most suitable mortgage deal for you.

Arrangement Fees

The first big cost to consider is the arrangement fee, sometimes known as an application or booking fee. This is usually a flat amount but can also be a percentage-based charge. Here's what to consider:

Pay now or defer? Some deals require you to pay all or part of this cost upfront, while others allow you to defer the cost until completion and may even permit you to add it on to the loan.

No fee? Some deals don't carry any arrangement fee at all; while you will have to pay a higher interest rate in return, people only borrowing a small amount this could benefit from this type of deal.

High or low fee? In addition, some lenders will offer two different versions of what is effectively the same mortgage - one with a lower interest rate in exchange for a higher fee, and the other with a higher interest rate and a smaller fee.

What can you afford? The arrangement fee can significantly change the competitiveness of the mortgage in question. For many people, deciding whether to go for a low fee and a higher rate, or a higher fee with a lower rate, will come down to their finances at the time they apply for the mortgage and whether they can afford to pay a larger fee.

What's best for you? The amount you are borrowing can also determine the best deal for you. David Hollingworth, mortgage specialist at London & Country, says people borrowing a small amount might be best going for a low fee and a higher interest rate. This is because the bigger the mortgage, the bigger your interest payments will be, whereas an application fee tends to be a flat cost so will have a bigger impact on smaller amounts.