Purchasing a new home can be a stressful process. Aside from arranging removal companies, house insurance, solicitors etc, there also comes the added pressure around choosing the right mortgage product/deal for you.
Value for money has never been as important as it is just now with mortgage intermediaries playing a key role in ensuring new buyers and existing home owners alike strike a balance that not only delivers on rate, but also long-term value.
Without the right advice, buyers/owner’s obsession with headline grabbing rates can often mean that they are susceptible to paying thousands of pounds in unexpected costs……. the devil is in the detail.
Independent surveys point to UK borrowers considering interest rates to be the most important factor when choosing their next mortgage product. This rate-based demeanour can lead to borrowers missing important elements such as early repayment charges, valuation fees, funds transfer fees and legal fees. A small portion or lenders also charge a fee to release you from your mortgage either on full redemption or remortgages to another lender.
There are thousands of products available in the market offering varying degrees of flexibility. Fixed, discounted and tracker rates can come both with and without “early redemption penalties”. For those with penalties, they are percentage based and calculated on the outstanding balance at the point of redemption.
For example, a 5-year fixed rate mortgage can attract a 5% early redemption penalty in year one, so for example, on a £500,000 mortgage, this could be upto £25,000.
It is important that borrowers understand the implications of tying in to a longer-term deal as they may wish to consider moving in future. Most lenders will allow borrowers to port their existing mortgage onto a new property without penalty, however this isn’t the case with some. There can be complications for upsizers and downsizers as the borrowers’ individual circumstances may have changed.
‘For example, if you have since become self-employed your current lender may not accept your new mortgage application. In this instance, you may be forced to redeem your mortgage with one lender in order to move to another, and this will incur a penalty.
As I have alluded to earlier, there are over 50,000 products in the market place including fixed rates, variable rate trackers and discounted rates. The latter two have potential implications should interest rates rise or fall in future so it can be a complicated area to consider.
Other important points to consider
There are many other factors that borrowers should consider. These include fees, namely up-front fees or fees that can be added to your mortgage.
There is often an arrangement fee which can either be paid upfront or added to the mortgage amount.
This can have a real baring on whether lowest advertised mortgage rate actually amounts to the cheapest deal.
For example, borrowers looking to purchase a new property may be drawn in by Platform’s (The Intermediary arm of the Co-op Banking Group) two-year fixed deal currently offering a headline-grabbing 1.04 per cent interest rate.
But the mortgage, which is available to borrowers with at least 40 per cent deposit, also comes with a hefty £1,495 product/arrangement fee.
Alternatively, the Halifax have a two-year fixed rate mortgage at 1.39 percent with no product fee, or Santander at 1.44 per cent. For lower value mortgages, the latter products, albeit with a higher interest rate, would work out cheaper over two years than the first example.
It is important for borrowers to fully consider the bigger picture when choosing the best possible mortgage deal. For example, lower rate mortgage deals, typically two-year fixed rates may come with arrangement fees that would be payable on renewal/remortgage, every two years.
Also, as we navigate through the COVID pandemic lenders are looking to entice borrowers in with more competitive mortgage deals, whether this be through lower interest rates, the enticement of additional services such as free valuations, free legals and or cash back offers.
It can be difficult to factor in such incentives when trying to pick the best value mortgage deal, and this is where the devil can be in the detail.
This is where an independent mortgage adviser can be invaluable. An independent mortgage adviser can fully assess your requirements/needs, complete all of the necessary research and provide a recommendation, with full justification taking into account every available lender in the market.
This article was written by Ben Horsfield, Head of Mortgage Services, Suttons Independent Financial Advisers Ltd