Understanding the "true cost" of a mortgage

20th July 2017

The ‘true cost’ of a mortgage refers to the total cost of the mortgage over the initial term, including any fees you may have to pay. Knowing the true cost of a mortgage is important before you choose a deal, as comparing deals based purely on the interest rate doesn’t give the full picture of the amount you’ll need to repay.

True Cost Mortgage

What does ‘true cost’ mean?

‘True cost’ means the total cost of a mortgage over the initial term, taking into consideration both the fees you have to pay and the incentives the lender is offering - such as cashback, a free valuation, or free legal fees. After taking fees into account, a mortgage with a low rate may have a higher true cost than a deal with a higher rate. Although the lower rate deal would have smaller monthly repayments, the higher rate could work out cheaper if the fees were much lower.

Often the cheapest deals have some of the highest fees. Lenders entice borrowers by low rates but make money back by charging expensive fees.

Does a lower rate always work out cheaper?

A lower rate doesn’t necessarily mean a cheaper deal. Comparing mortgage rates alone doesn’t show you how much you’ll be spending on your mortgage in total. As tempting as it may be to apply for the lowest rate deal, hold fire until you’ve established the true cost. The most competitive deals also tend to have stricter eligibility rules in place.

For example, a two year fixed rate deal at 0.99% with fees of £2,601 would work out more expensive than a two year fixed at 1.49% with no fees. The true cost of the lower rate deal would be £8,677.08, while the true cost of the higher rate deal would be £6,952.

This example is based on a property value of £100,000 and a borrowing amount of £60,000. With a property value of over £200,000, it usually works out cheaper to take the lower rate.

What fees do I need to pay to get a mortgage?

There are a number of fees you may need to pay when getting a mortgage. Read our summary of mortgage fees for a clear picture of exactly what you may have to pay when taking out a mortgage.

Not all lenders charge the same fees, which is why working out the true cost is important. Most lenders will charge an arrangement fee of around £1,000, however, lower interest rate mortgages often have higher arrangement fees.

You can either pay the arrangement fee upfront to avoid paying interest on the amount, or add it to your loan and pay it off with your monthly repayments for convenience, keeping your upfront costs lower.

Conveyancing fees are a necessity whichever mortgage you get, although some remortgage deals are inclusive of legal fees.

Many mortgages come with Early Repayment Charges (ERC) which can end up making your mortgage a lot more expensive. Depending on the terms of your deal, you could be charged an ERC if you pay off your mortgage during the initial term. If you’d like the flexibility to pay your mortgage off early, consider choosing a deal that allows overpayments to make sure you’re not adding to the true cost in early repayment fees.

Some lenders charge a valuation fee, a mortgage account fee, and a set-up fee, but a mortgage broker will advise of the most cost-effective deal.

How can I find out the ‘true cost’ of a mortgage?

Changes to the size or length of your mortgage can make working out how much your mortgage will cost over the whole term difficult - especially as interest rates are likely to change during that time. Working out the true cost over the initial term gives you a better idea of the most suitable deal.

The easiest way to work out the true cost of a mortgage is to use a mortgage broker. A mortgage broker will look at the interest rate, fees, and incentives before recommending a deal, saving you time and energy.

You might see lower interest rates offered elsewhere when you receive your recommendation from your broker. However, your recommendation will be based on the overall cost of the mortgage during the initial term, which includes fees that could offset the saving of a lower interest rate.

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