You’ve found you’re dream home, you’ve got the deposit sorted and you’ve managed to find a mortgage with a low interest rate. However, before you tie yourself in you need to make sure that the mortgage fees don’t leave you out of pocket.
A recent study by comparison website MoneySupermarket found that mortgage fees have shot up by 20% since September 2009 and in some cases the fees that you pay can negate the savings offered by a low rate of interest.
So how exactly can you be sure that you’re going to be paying more in the long run? Here, we take a look at how you can work out whether it’s worth your while paying a bit more in fees to pay a little less in interest.
What difference do mortgage fees make?
The research by MoneySupermarket revealed that the fees on fixed and tracker mortgages have risen by 20% since September 2009, meaning that the average fixed mortgage fee has gone from £705 to £812 while a tracker mortgage now incurs a cost of £961 when it was £772.
Tracker mortgages also come with what is known as a booking fee and this has risen to £314 from £247 in September 2009.
Typical fees are generally around the £1,000 mark, but some banks and building societies charge percentage fees that can be as much as 3.5% of the total amount borrowed. This means that some of those mortgages with the eye-catching, low headline rate do not offer the best value over the length of the loan.
However, it’s not simply a case of avoiding the higher fees to get a better deal as the impact that the size of the fee will have is largely dependent upon the size of the mortgage.
So if you are borrowing a large amount, because you will pay the interest charged on the amount you borrow, it may be worthwhile paying the higher fee to secure a lower rate of interest. However, with smaller mortgages, it can often be work out cheaper to opt for a slightly higher rate of interest in order to keep the set up costs down.
How to work out the total cost of a mortgage deal
The simplest way to work out the total cost of a mortgage deal that you have your eye on is to multiply the monthly repayments by the number of months in the term and then add on the associated fees.
For example, if you’re looking at a two-year mortgage deal with monthly repayments of £1,000 and fees of £750 you multiply £1,000 by 24 which gives you a total of £24,000. Then add on the £750 and the total cost is £24,750.
Again, it’s not always quite this straightforward and complications can arise if any of the variables change, for instance if you were to take out a tracker mortgage where the rate can change.
So while this calculation will give you a good idea of the total cost over the term, you need to be sure that you are able to afford the monthly repayments should there be a rate rise and so it is often worthwhile getting professional advice.