Borrowers have been warned once more to check the true cost of their new mortgage deal rates that top the best buy tables are ‘misleading’.
Trussle, an online mortgage broker, looked at the top ten cheapest mortgage rates and compared the overall cost of the deal including the fee.
It found that while Santander topped the table for the lowest rate – a two-year fix at 1.09 per cent – it dropped to 21st place for the average mortgage amount when deals were ranked by their true cost and the deal’s £1,499 fee was taken into account.
Just 44 per cent of homeowners said they took account of upfront fees when they chose a deal
With a two-year fixed rate of 1.36 per cent, Danske Bank failed to appear anywhere on the top 10 best buys for rate, but topped the table for the best value deal when both rate and its £0 fee were considered.
If you borrowed £100,000 over 25 years on the Santander deal, monthly repayments would be £381, while the cost over the two years including the fee would be £10,642.
On the Danske Bank deal, monthly repayments are £393 – £12 extra a month – but the overall cost of the deal over two years is £9,441, which is over £1,200 less.
Ishaan Malhi, chief executive of Trussle, said: ‘The way that mortgages are being displayed is at best inconsistent and at worst misleading.
‘Borrowers are enticed into making decisions based on low headline rates rather than true cost, and can end up paying out more than they would on other available deals. Simply put, mortgage rates are overrated.’
It’s important to note that on a smaller mortgage amount, the impact the fee has on overall cost is bigger however.
If you are borrowing a large amount, then lower rates and paying a fee can actually be a much better option.
For example on a £600,000 mortgage, the Santander deal would have monthly repayments of £2,286 while the overall cost over two years is £56,357.
On the Danske Bank deal, a £600,000 mortgage monthly repayments are £2,360 and the overall cost over two years including the fee is £56,648 – a full £291 more than the Santander option even with a £1,499 fee.
A spokeswoman for Santander said: ‘Some customers choose to pay a fee and get a lower rate, whereas some customers prefer to not pay a fee and pay a higher rate.
‘Our products are competitively and transparently priced, if customers have any questions they can go online, contact us on the telephone or visit us in branch or speak to a broker.’
| Rank | Lender | Lowest initial rate deal |
|---|---|---|
| 1 | Santander UK | 1.09% |
| 2 | Sainsburys Bank | 1.19% |
| 3 | Platform | 1.19% |
| 4 | Principality Building Society | 1.20% |
| 5 | Yorkshire Building Society | 1.24% |
| 6 | Barclays Bank | 1.28% |
| 7 | Nationwide Building Society | 1.29% |
| 8 | Coventry Building Society | 1.29% |
| 9 | Bank of Cyprus | 1.29% |
| 10 | The Co-Operative Bank | 1.29% |
| Source: Trussle | ||
The firm also surveyed 2,000 UK mortgage borrowers to find out what they thought of the information and support available when searching and applying for a mortgage.
Less than a third said they understood all of the information presented by lenders while they were considering their current mortgage deal.
The research also found that many borrowers do not consider the true cost of their mortgage deal.
It claims that just 44 per cent of those surveyed took account of upfront fees when they chose a deal, while only a third considered what the standard variable rate would be once their initial term ended.
| Rank | Lender | Lowest true cost deal | Associated initial rate | Upfront cost |
|---|---|---|---|---|
| 1 | Danske Bank | £12,800 | 1.36% | £0 |
| 2 | TSB | £12,941 | 1.43% | £35 |
| 3 | Nationwide BS | £13,213 | 1.29% | £519 |
| 4 | Sainsburys Bank | £13,255 | 1.19% | £770 |
| 5 | Yorkshire Building Society | £13,320 | 1.24% | £730 |
| 6 | Skipton Building Society | £13,420 | 1.76% | £6 |
| 7 | Barclays Bank | £13,421 | 1.28% | £834 |
| 8 | Teachers Building Society | £13,488 | 1.79% | £25 |
| 9 | Scottish Widows Bank | £13,513 | 1.34% | £774 |
| 10 | Clydesdale Bank | £13,574 | 1.39% | £789 |
| 21 | Santander UK | £13,759 | 1.09% | £1,534 |
| Source: Trussle (Trussle’s true cost calculations are based on a UK average house price of £225,956, with a 60 per cent loan-to-value mortgage, meaning a loan of £135,574.) | ||||
While most lenders bump borrowers onto their SVR at the end of their deal – typically two or five years – you can avoid this be remortgaging either with your existing lender or with a different one.
The average SVR is now between about 4.5 per cent and 5.5 per cent, though some lenders charge much more – up to around 12 per cent.
However, with such stiff competition in the new rates market, lenders are starting to offer more competitive rates for those who can’t be bothered to remortgage.
Santander, for example, has just lowered its default rate for borrowers who don’t remortgage to another deal.
The lender’s new ‘follow on rate’ is a variable rate that tracks at 3.25 per cent above the Bank of England Base Rate (currently 0.5 per cent), giving a current rate of 3.75 per cent.
Its SVR is higher, currently at 4.74 per cent, and applies to customers who took a mortgage before the 23 January 2018.
How to choose the best value mortgage
There’s a really simple way to avoid falling into the trap of paying more for what looks like a cheaper rate if you’re determined to arrange your mortgage yourself without using a broker.
Use This is Money’s true cost mortgage calculator here and below to work out what deals will actually cost you.
Using a mortgage broker will also reduce the risk that you opt for the wrong deal and end up overpaying.
Brokers are bound by law to recommend the best deal for you, so they should be taking account of the fee as well as the rate.
One important thing to note: low rates and high fees doesn’t always mean bad.
It comes down to what’s important to you – how much you can afford to pay each month or how long it takes to you repay your deal overall, and therefore whether you’re prepared to pay a bit more in order to have more financial freedom in the short-term.
True cost mortgage calculator
This mortgage payment calculator will allow you to see the effect of sneaky arrangement fees on your repayments. Use the second part of the calculator to compare deals.