Mortgage blog: How to work out the true cost of your mortgage

Posted 22 April 2014

Buying a property is probably the biggest financial commitment you will make. According to the Office for National Statistics over 8.5million UK households have a mortgage costing an average of £600 per month. The average homeowner pays £3,468 in interest every year, equivalent to £86,700 over a 25-year mortgage.

So, when you choose a mortgage it is vital that you find one that offers great value. However, this doesn't necessarily mean simply choosing the lowest interest rate. Working out the true cost of your mortgage can end up saving you thousands of pounds.

No-fee deals often better for smaller mortgages

Choosing a new mortgage can be a minefield. While it may be tempting to choose the lowest interest rate, some of these deals boast eye-watering arrangement fees. Do you pick a low rate with a high fee or a higher rate with a lower fee?

Generally speaking, the bigger your mortgage the more important it is to choose a low interest rate. You're likely to save more in terms of your repayments on a large mortgage by picking a low-rate deal as the interest savings will be more significant. However, if you want a small mortgage it can pay to choose a higher interest rate with little or no arrangement fee.

The crossover point is often between £150,000 and £200,000.

Here's an example. If you took out a £100,000 mortgage on a two-year fixed rate at 2.49% with no arrangement fee you would pay £448 per month, giving you a total cost of £10,752 over two years.

If you took the same mortgage on a deal at 1.6% but that came with a £1,999 fee you would pay less each month (£405) but the total cost over two years would be £11,719. The higher interest rate is actually £967 cheaper.

However, the situation changes when you start borrowing more. For a £200,000 mortgage, the 1.6% deal works out slightly cheaper, costing £21,415 - including the fee - compared with £21,504 for the no-fee deal.

Keith Osborne, editor of, says: "It is not simply a case of choosing the lowest interest rate but working out the total cost of a deal. You should take your repayments and the arrangement fee into account as well as other costs or incentives such as the valuation fee and any cashback that is available.

"If you're struggling with the numbers then seek the advice of a mortgage broker. They will be able to do the sums for you and advise you on the best deal."

Click here to find out more about how can help you find the right mortgage.



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