It is hard for home borrowers to be aware of the true best deals when it comes to mortgages as charges and incentives are not always made clear, new research suggests.
Many low rate mortgage deals may look attractive but they often come with high upfront fees which are buried in the small print, according to an analysis of leading deals from more than 70 lenders.
As a result the mortgage saver review from online mortgage broker Trussle is calling for lenders to make the true cost of a loan clear. The firm believes that too often potential borrowers are misled by best buy headlines.
It gives as an example the lowest headline two year fixed rate on the market with Santander at 1.09% where the mortgage repayments plus the total £1,534 upfront cost would cost them £13,759 over the two year initial period. In contrast, Danske Bank’s 1.36% deal, with no additional upfront cost, would cost a borrower £12,800 over two years, almost £1,000 less.
The pattern is the same in the five year fixed market. While Yorkshire Building Society’s 1.89% rate appears one of the best value deals on the market, the true cost to the average borrower would be £35,254 over five years, almost £1,300 more than the true cost of Nationwide’s five year fixed rate of 1.99% which would be £33,958, despite the latter having a less attractive headline interest rate. The Nationwide deal has a £500 incentive, while upfront costs for Yorkshire Building Society’s deal amount to £1,230.
In one of the more extreme examples, a leading two year rate from Progressive Building Society and Hinkley & Rugby are both 1.89%, yet the latter would cost the average borrower £1,411 more over the two year initial period.
Some of the lowest rate deals become less attractive when ranked by true cost. The first table below shows the ten lowest two-year fixed rate deals on the market from 75 lenders. The second table below shows the top ten, after we re-rank the same 75 deals by true cost, accounting for fees and incentives.
The research 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. Just 30% said they understood all of the information presented by lenders while they were considering their current mortgage deal while 9% felt that advertised deals were hiding important information.
It also found that 75% borrowers came out in favour of lenders rolling all charges and incentives into one true cost figure when they advertise deals.
Overall too many borrowers do not consider the true cost of their mortgage deal. Some 44% of those surveyed took account of upfront fees when they chose a deal, while just 33% considered what the Standard Variable Rate would be once their initial term ended.
According to Ishaan Malhi, chief executive of Trussle, a lack of transparency is currently hindering the very beginning of the mortgage process and causing undue stress for borrowers.
‘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,’ he said.
‘From our research, we know that the vast majority of borrowers want lenders to roll all charges and incentives into a true cost figure, and we’ve seen just how useful it would be for people to have this figure to hand when they’re choosing a mortgage,’ he explained.
‘If lenders can agree on a method for calculating the true cost of deals and make this information clearly available to borrowers, the market would become far more transparent and would function better for everyone as a result,’ he added.