Do you know the true cost of your mortgage?

Buying a home can be notoriously stressful. One of the reasons is because a property is probably your biggest purchase. There are lots of decisions to make and most of us aren’t qualified to make them alone.

It doesn’t help that there’s one thing about mortgages that’s really confusing when it shouldn’t be.

Incredibly, it’s how much you actually pay.

Why the cost of your mortgage is unclear

When you’re choosing your mortgage it’s natural to focus on the headline interest rate, given that the industry shouts about them loudest. But this rate rarely indicates how competitive the deal is compared to others.

Mortgages have different fees and incentives, and lenders, brokers, and comparison sites display their deals in a variety of ways. This makes it really difficult to compare different products.

Here are some examples…

Sources: RBS Nationwide

It’s no surprise that fewer than one in three (30%) borrowers understood all the information presented by lenders while considering their current mortgage deal, according to a survey for the Mortgage Saver Review, published by Trussle, the online broker, in February 2018.

Almost half (46%) found the process confusing. A worrying number of people (9%) even felt that the deals were hiding important information, the report found.

This lack of transparency meant that 21% of borrowers in the survey say they were hit with unexpected charges or rate increases. Around half of them had more upfront costs than they anticipated, while a third paid a mortgage arrangement fee they didn’t know about.

Unfortunately, less than half (44%) of borrowers surveyed took account of upfront fees when they chose a deal. And only a third (33%) considered what the Standard Variable Rate would be once their initial mortgage term ended.

The real cost of your mortgage

No one wants to pay more for their mortgage than they need to. It’s tempting to choose a mortgage with the lowest interest rate. But that doesn’t necessarily mean that you’ve found the most competitive deal.

If you’re looking for the cheapest mortgage to suit your circumstances, you need to consider its true cost.  

This means looking at everything you’ll be paying, not just the interest rate. You need to take into account the fees, as well as any incentives you’re offered such as a free valuation, free legal fees, or cashback.

You could find that a mortgage with a low interest rate has a higher true cost than a deal with a higher rate. Lenders can attract borrowers by low rates, but recoup the money by charging expensive fees.

A significant number of borrowers could be losing out, according to the Financial Conduct Authority (FCA), which regulates mortgage lenders.

Around 30% of consumers in 2015-2016 could have found a cheaper mortgage with the same key features as the product they chose, the FCA estimated in its Mortgages Market Study, published in 2019.

On average, these consumers paid around £550 per year more over the introductory period compared to the cheaper product, the report said.

Lenders need to reveal the true cost of their deals

Mortgage lenders need to display their deals by their true cost so borrowers know exactly what they’ll pay over the initial period of their mortgage.

Displaying a mortgage’s true cost is one of the commitments of the Mortgage Switch Guarantee. This campaign, proposed by Trussle, is calling for transparency for borrowers at each step of the home ownership journey.

Lenders and policymakers will need to work together to implement the Mortgage Switch Guarantee and stop unfairness for borrowers.

Make sure you know what you’re paying for your mortgage

If you want clear and simple information about mortgage deals so you don’t pay more than you realise, support the Mortgage Switch Guarantee.

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