Have you ever tried comparing different mortgage deals to find the cheapest? Our latest research has found that 90% of homeowners and homebuyers struggle to work out the total cost of a mortgage deal.
Navigating the mortgage market can feel like getting lost in a labyrinth. For a start, you have to consider the differing interest rates, widely varying arrangement fees, and deals that all last for different lengths of time.
Could you find the cheapest deal?
We decided to test just how difficult it is to spot the cheapest mortgage deal. We asked 1,001 people to rank five mortgage deals in order of cost over the mortgages’ fixed two-year term.
Even though they had the necessary information to complete the task and were allowed to use a calculator, only a quarter of people we asked were able to identify the cheapest and most expensive deals. More worryingly, only 97 people in total ranked all the deals in the correct order. That’s only 10%, despite 49% of respondents saying they found the test ‘easy’.
You can’t work out which mortgage deal is best based on interest rates alone. You also need to take arrangement fees into account, which are now more than £1,500 on average.
The advertised Annual Percentage Rates (APR) aren’t much use to shoppers either. While the APR on a mortgage does include both interest and arrangement fees, it also assumes you’ll keep the mortgage for 25 years.
So, the impact of high arrangement fees is therefore spread over 25 years – a period most people are unlikely to keep the same mortgage for. The calculation also assumes that banks’ variable interest rates won’t change at all. It’s safe to say that the historically low interest rates we’re currently seeing won’t last for another 25 years, so APR could be a misleading indication of the cost of a mortgage for many borrowers.
Overall, it seems there’s no easy way for people to compare mortgage deals quickly and easily themselves.
Help navigating the mortgage maze
Alternatives to APR need to be explored. That could be a comparison tool on every provider’s website, or a new way to calculate and display interest and charges over different periods. Or it could be another solution altogether.
For the individual consumer, the best way to get a competitive mortgage deal is to take independent advice from a whole-of-market broker. But in a properly functioning mortgage market, it should also be easy for borrowers themselves to compare deals and make their own decisions.
At the moment, many lenders are offering attractive interest rates on their mortgages. However, mortgage fees have risen dramatically in the last two years, making it more important than ever for borrowers to understand the overall cost of mortgage deals. So we want lenders to be more transparent about the true cost of mortgages so that borrowers can compare deals more easily.
If you’ve taken out a mortgage recently, how did you compare deals? What information would have helped you to make a decision?