Experts highlight the “frightening” cost of some new mortgages

Posted 4 November 2015 by Nick Parkhouse

Research from Moneyfacts has revealed that many of the cheapest mortgage could see you hundreds of pounds out of pocket...

If you're looking for a new mortgage it is natural to start by seeking out the lowest interest rate. Consulting 'best-buy' tables in a newspaper or online is a good way to begin your research but a leading financial analyst is warning that the very cheapest rates could end up costing you a lot more than you expect.

While choosing a mortgage deal offering a low interest rate might seem like the best decision, new research has revealed that paying more every month might actually save you money in the long run.

Moneyfacts has looked at a range of mortgage deals to compare the overall cost of the products taking into account both the interest payments and any associated fees. In many cases, picking a higher interest rate on a product with a smaller arrangement fee can actually work out cheaper over the term of the deal.

The analysts highlight the difference in overall cost between a Post Office mortgage deal at 1.15% fixed for two years and a similar fee-free deal with HSBC at 1.89%. While the Post Office deal will see you benefit from lower payments, the £1,995 arrangement fee makes the product much more expensive overall.

Charlotte Nelson, finance expert at Moneyfacts, says: "While these low deals look great on paper they are often accompanied by high fees that can scare even the most seasoned borrower. With fees on mortgages ranging from nothing all the way up to £2,794 – and the average mortgage fee sitting at £939 today – it is easy to see why it can be a costly mistake to opt for the wrong deal.

"The low-rate/high-fee combo favours those borrowers looking to purchase properties at the high end of the housing ladder. However, large fees can turn what appears to be a cheap deal into a costly one for the majority."

Be careful with smaller mortgages and short-term mortgage deals

It may seem counterintuitive to choose a higher interest rate but this can result in huge savings, particularly if you're taking out a smaller mortgage. This is because the impact of large fees on the overall cost of your mortgage is more pronounced on smaller loans.

In addition, the true cost of short-term mortgage deals is also heavily affected by the arrangement fee. Nelson adds: "Borrowers choosing a two-year fixed rate will find the size of the arrangement fee particularly important, as the short-term nature of the deal means that borrowers will have to remortgage relatively soon and could pay yet another pricey fee.

"It can often be a torturous process looking for a mortgage as there are so many costs affecting the overall price, but borrowers need to avoid being swayed by a low headline rate and instead should work out the true cost of the loan."

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