Homeowners and buyers’ obsession with the lowest possible mortgage interest rates is leaving them susceptible to thousands of pounds in unexpected costs.
Most borrowers are focusing on enticing rates and overlooking fees and early repayment charges when selecting a mortgage, according to the latest research from Legal & General Mortgage Club.
Nearly two thirds of UK borrowers consider the interest rate to be the most important factor in choosing their next home loan, according to L&G.
Only 13 per cent of borrowers see early repayment charges as being important to consider when getting their next mortgage, according to research from L&G
But only 13 per cent of borrowers see early repayment charges as important, meaning they could face thousands of pounds in extra costs if they wish to move to a new product before their existing fixed deal ends.
A borrower locked into a five-year fixed rate deal on a £250,000 mortgage, who then decided to move or remortgage before the five years is up, could face £10,891 in early repayment charges according to L&G analysis.
‘Our latest research shows why it is important to look beyond the headline rate and consider other factors, like exit charges,’ says Kevin Roberts, director at L&G Mortgage Club.
‘Not doing so could mean having to pay thousands in unexpected costs when the time comes to move home or remortgage.’
Remortgaging prior to the initial fixed rate deal ending will usually result in an early repayment charge, which often ranges between one to five per cent of the outstanding mortgage amount.
Early repayment charges can be a serious issue for those looking to move home before their fixed rate deal comes to an end.
‘With Covid-19 changing the way we want to live and the stamp duty holiday offering a financial incentive, we’ve seen a huge increase in housing transactions over the last year,’ says Daniel Hegarty, chief executive of online mortgage company, Habito.
Early repayment charges often range between one to five per cent of the outstanding mortgage amount, and can be a serious issue for those wanting to move
‘Unless timed perfectly with the end of their current mortgage’s fixed-rate deal, many of these buyers will have faced charges from their lenders to be released from their current mortgage early.
‘For some buyers, this will be a price worth paying to get their new dream home, but for others, it will have come as a nasty shock, or worse still completely sabotaged their plans to move.’
Lenders often allow borrowers to move their mortgage to another property without fees, in what is known as ‘porting’ – but this doesn’t work for everyone.
It can be problematic for home movers who may require a new mortgage in order to fund the purchase, whether they be upsizers requiring a bigger loan or downsizers looking to pay off some of the outstanding balance.
There may also be an issue if a home mover’s circumstances have changed.
‘With porting, you generally do not have to pay early repayment charges,’ says Sykes. ‘However, you still have to satisfy your lender’s requirements at the time of the new application.
‘For example, if you have since become self-employed your current lender may not accept your new mortgage application.
‘If you can’t therefore port the mortgage, you have to pay the early repayment charges and remortgage with another lender.’
There are ways to avoid these charges and give yourself greater flexibility to change mortgage as and when you need, according to Sykes.
‘Fixed-rate deals may be most peoples preferred choice, but tracker and variable rates may suit some people better as these can often come with flexible features like no early repayment charges so people can make a partial repayment as and when they need,’ said Sykes.
But tracker and variable rates also come with added uncertainty over future interest rate changes.
There are some fixed-rate products out there with no exit fees, but borrowers will need to lock in for a long time.
Habito’s new 10 to 40 year fixed rate mortgages, for example, enable borrowers to fix the interest for the lifetime of the mortgage with no exit fees, albeit at a higher rate of interest than the market average.
What else should borrowers consider?
On top of early repayment charges, borrowers should also consider the upfront fees that typically come alongside a mortgage deal.
There is often an arrangement fee which can either be paid upfront or added to the mortgage amount.
This may mean the cheapest overall mortgage deal is not necessarily the one with the lowest interest rate.
For example, borrowers looking to remortgage might be drawn in by TSB’s new two-year fixed deal currently offering a headline-grabbing 0.99 per cent interest rate.
But the mortgage, which is available to borrowers with at least 40 per cent equity built up within their homes, also comes with a hefty £1,495 product fee.
For a borrower with a mortgage of £120,000 on a 30-year term, it would cost £10,735 over the initial two-year fixed period with TSB.
Nationwide currently offer a two-year fixed deal with a 1.54 per cent interest, but with no fee and the offer of £500 cashback.
Although, the monthly payments would be higher, the total cost of a £120,000 mortgage over the two-year period would amount to £9,484 once the cashback had been included.
However, whether or not it is beneficial selecting a higher interest rate with a lower product fee will largely depend on how large the mortgage is.
‘Often the lower the interest rate, the higher the product fee so for someone borrowing £100,000, paying a high product fee for a better interest rate may be an expensive thing to do,’ says Sykes.
‘Whereas for someone borrowing £500,000, the higher fee may be worth it in order to secure the lower interest rate.’
Borrowers not only need to be wary of paying the higher fees, but also the frequency at which they will be required to pay them if they continue to choose shorter mortgage deals in a bid for the cheapest interest rate.
‘Lower-rate products are typically the shortest fixes on the market, but, keep in mind that you’ll pay these fees every time you remortgage,’ says Will Rhind, head of mortgage advice at Habito.
‘Most mortgages have fees of around £999, so if you chose a two-year fix every time, you’re also going to pay that fee potentially 14 times over a 30-year mortgage term, costing you around £14,000 in fees alone.
‘Comparing that fee cost to taking a 5-year, or a 10-year mortgage each time, then the rate might be higher, but you’ll pay fees just six or three times over the lifetime of the loan, not 14 times.’
On top of product fees, lenders sometimes offer financial incentives such as covering the cost of a borrower’s legal fees or the mortgage valuation.
‘Lower-rate products don’t tend to come with many freebies, whereas those with higher monthly interest rates can come with free house valuations, no legal fees, the promise of cashback, and more,’ says Rhind.
‘Sometimes it can be worth it, but other times not – so you need to watch out for both low and high-rate mortgages and compare their true cost with everything – freebies and fees – included.’
You can do this using This is Money’s mortgage calculator.
Another key consideration when applying for a mortgage is whether you might want the option to overpay your mortgage each year.
Overpayments are extra payments made on top of the usual monthly mortgage commitments, which will enable borrowers to pay off their mortgage faster and save on overall interest.
The majority of fixed-rate mortgage deals allow borrowers to make overpayments amounting to 10 per cent of the total outstanding amount each year without incurring early repayment charges.
Some are more flexible, but others may be more restrictive, so borrowers should always check before making overpayments.
‘The best way to save money on your mortgage is to pay it down as quickly as possible,’ says Rhind.
‘If you’re in a job where you’re paid bonuses or you’re likely to have a financial windfall or come into any inheritance, it’s important to know how much you’re allowed to overpay on your mortgage before you get charged a fee.’