The lowdown on rates

Is the lowest rate always the best option? We look into factors such as arrangement fees and cashback for an up-to-date understanding of the situation.

When consumers study their options before buying a home or remortgaging, many make the error of focusing on the initial rate without factoring in extra fees. An arrangement fee is a one-off charge for setting up a mortgage, and will typically amount to around £499 to £1,999. When applying, you’ll be presented with the option of either paying it upfront or adding it onto your mortgage and paying it back over the duration of the term. While the latter option can sound attractive, it’s better to settle the fee upfront if you can afford to do so.

If you add the fee to your mortgage loan, interest will be charged for the entire period needed to pay it off. Thankfully, four in 10 mortgages now come without any arrangement fees (that’s according to comparison site Moneyfacts). But this growing trend means it’s more critical than ever before to delve deeper than the headline rates when searching for the right mortgage deal. Two years ago, only 33% of mortgages were free of these fees. The figure surged to 36% by July 2017 before gradually edging up to 40%.

The bottom line is that the cheapest deal is often NOT the one with the lowest headline interest rate. Even with an overwhelming 274 new fee-free products entering the market in 2018 alone, 60% of deals DO still involve extra fees. So as you can see, the mortgage landscape is becoming harder to navigate! This is before we start to consider other relevant innovations such as lender cashback. Right now, over 800 of the approximately 3000 fixed-rate mortgages available for first-time buyers offer some type of cashback – ranging from £250 to £1,250 (or even £1,500 in Northern Ireland).

We find that the total savings enabled by cashback will often amount to only several pounds per month over a two-year period, so don’t be too wowed by these offers. Always try to look at the bigger picture when comparing and contrasting different mortgage deals. Cashback is more of a pleasant bonus rather than a deal-breaker – just don’t base your decision on this alone.

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