Finding the cheapest mortgage deal is harder than it seems

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?

richard says:

20 June 2013

Sorry I don’t think it is possible to work out the whole cost of mortgage deals – because they change over the 25 years of a mortgage. Interest rates change – mine went up to 15% much higher than when I started – many friends couldn’t afford the rise and went broke – exactly how would I have known IN ADVANCE??
Many friends had endowment mortgages recommended by brokers – they lost their homes – Interest only mortgages are different because you are not paying the capital cost back and they are going broke . The very low interests at the moment are not sustainable so many will lose their homes when mortgage rates rise to historical levels. When I bought my house the cost was roughly 3 times income – 10 years later the cost was 10 times income – I could not have bought the same house even though my income had risen and it was a “good” job. I was “lucky” only because I opted NOT to go on holidays for FIFTEEN YEARS to pay the ever increasing mortgage payments. The only type of mortgage that had any chance was the prepayment mortgage that I opted for..
This coupled to the Tory sell off of council housing and rent deregulation and the Buy to Let Fiasco meant the housing costs are prohibitive whereas before Thatcher they had only risen in line with inflation – not rocketed out of control. It is one reason why I would never vote Tory again – This was accidental but a deliberate Tory decision.- I used to vote Tory until Thatcher.

Patrick Steen says:

Hello Richard, your comment got stuck in our spam queue. Not sure why – sorry about that. I’ve removed your following comments alerting us to this, hope you don’t mind.

Michael100 says:

26 June 2013

Richard, If you used to vote Tory until Thatcher, then you didnt vote Tory.

May I explain.

Before the 80’s and Thatcher, Britain’s Conservative party both in and out of Government were left of centre, caring, with a good social conscience.

But Thatcher changed all that from 1979 when she infiltrated the Conservative party, and changed into into an ultra right wing fascist party who have basically along with their supporters, taken the soul from Britain. You mentioned council house sell offs.”right to buy”. Well Thatcher also stopped building council houses from the 80’s. Hence our housing crisis today, hence our poor State pensions today, hence our rocketing utilities today. I could go on………..You get the drift!!

Tony W says:

2 July 2013

Be a mortgage tart ie review your mortgage provider every few years and save 000’s. A few years ago I put together a simple spreadsheet which just adds up the total costs for a mortgage over two or three years and compare the options. It made comparing mortgage offers easy and resulted in me changing company every 2/3 years – yes a bit of a drag re admin but as it is many householders biggest cost certainly worth doing. The main thing is to just focus on the next two to three years don’t worry about the full term – just break it into bite sized chunks and enjoy the savings. Maybe Which should do this exercise on a regular basis on their back pages to make mortgage provider selection easier or provide this simple tool on their website.

John Ward says:

I think “arrangement fees” are a disgrace and cannot possibly be justified. Banks and building societies sell loans. They are competing for our monthly repayments. Why on earth should the borrower not the lender have to sweeten the deal? It would be helpful to have a professional explanation for this situation. It’s time an independent organisation compiled comparative statistics and put them in the public domain.

nick davies says:

21 June 2013

I would have thought that the calculation is fairly simple: what is the sum of the repayments and fees made and by how much does that reduce the principal?

Graham Hall says:

27 June 2013

Its a shame that on this important topic Which? got so much wrong in their Money Magazine in July 2013. They made the claim that only 5 of 1001 got the order right, when it was 5 of a sub group, not the full 1001. They then published a table of the deals where the actual fees were replaced with the answers to the calculation i.e. two years interest plus the fees. I trust that Which will own up to their own mistakes in BIG print rather than hiding the the slips in a corner near the back.

Ian Cooper says:

28 June 2013

I have apparently got the mortgage deal calculations wrong , according to the answers given at the side of page 22 despite Four attempts at doing these different ways!
Has all the relevant info been given? If so, can someone give me a worked example for the ‘correct’ answers?

You take £100,000, multiply it by the interest rate, then multiply by 2 (years) and add the fee. Unfortunately the printed version on page 22 doesn’t show the original fee – it shows instead the result of the calculation!! So its very difficult to sort out when the base information is presented so badly. The fees should have been £1555, £ 1999, £1500, £295 and £995 – deal 1 to 5 in sequence.

Therefore taking deal one as an example, the interest comes to £3480 and the fee is £1545 making a total of £5025. Working this way deal 4 is the cheapest and deal 2 the most expensive.

If you add the fee to loan then the interest rate rules the roost and the deal order would be 1, 2 ,3 ,4 ,5, 1 being the cheapest.

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