Richard Campo, founder and managing director of mortgage and protection advisors Rose Capital Partners, explains what you should look for to ensure you get the best mortgage at the best price for you.
If finding the right mortgage was easy, I wouldn’t have a job. So it is a double edged sword– it’s great to have choice, but too much choice is a bad thing (as is common these days, it can lead to analysis paralysis). What I will outline here are key considerations when coming to select the most appropriate mortgage, so you can save as much money as possible whilst getting the most suitable product.
Surely getting the lowest rate on a mortgage is best?
In a word, no. This reminds me of the classic saying ‘price is what you pay, value is what you get’. The lowest rates available are typically variable rates. This is not always the case as it depends on what the market is doing, but it is broadly the case now. Do you want to run the risk of increasing payments if rates go up? If rates go down, can you be sure your lender will pass on the saving to you? As a result of historically low rates, many lenders have written a clause into their contract that your payments will go down even if rates do not. This is what is called a collar: please look out for them in your Ts&Cs, even if nothing is mentioned in your quote. So even using that simple example, you can see that it’s a bit of a minefield. You can not only go by a headline rate on the product as it depends on what the product is (fixed or variable).
What impact do fees have?
Another trick lenders use is to offer a low rate but high fees. Most lenders offer a range of fees on their products, from no product fee to fixed fees (typically £999- £1,999 or a 0.5%- 1% option). The general relationship is the higher the fee, the lower the rate. We are not against high fees, as if the rate is low enough that may make sense for you. A rough rule of thumb is the larger the loan, the more you benefit from this. Then equally the converse is true: the smaller the loan, the more focussed you should be on fees or even look to avoid them all together.
The actual product fee is also not the whole picture. Lenders charge huge variances in survey fees, from free to many thousands of pounds. This should also be factored into the overall cost, as should other fees like Application Fees (yes, you sometimes get changed a fee to apply, and then a fee for the product…), Deeds Fees, Redemption Fees, Survey Admin Fees (as above) & any other novelty things they choose to charge you for. While illustrations are standardised, what fees lenders charge are not.
Surely the APRC was introduced to see past all of this?
Yes, it was, but it doesn’t work. Let me explain why. The APRC (Annual Percentage Rate of Charge, formerly APR) was introduced to calculate the total cost of a loan, including all the factors I mentioned above. However, it is flawed for two key reasons:
- It assumes you stay with your lender forever, and pay their higher variable rate for the remainder of the mortgage term (for example, if you take a two year fixed rate on a mortgage over a 30- year term, it will calculate two years on the rate you will pay on the fixed rate, which can be as low as 1.05%, and assume you pay the higher variable rate, typically between 4.5-5% for the remaining 28 years).
- It assumes rates do not change, you do not make overpayments or you do not change lenders. That being said, you can’t model what will happen after your product period, but you can see on those three variables it is a guess at best.
The first point is the key one. If a lender offers a really low rate, but has a high SVR (Standard Variable Rate: the rate you will revert to if you do nothing after your initial product period), the APRC may come out higher, when in fact it could be cheaper for you to pay the lower rate now and ensure you switch after. Also, the SVR isn’t even a good guide as that changes whenever the lender feels like it. A great example is Accord. They used to have a variable rate of 5.79%, but cut that to 4.99% as many people were put off their great products due to the APRC coming out high and were concerned that their payments would treble at the end of their product period. In reality, Accord have an excellent retention policy of offering new products when the deal ends (with no underwriting) or you can always switch anyway. So no-one actually pays that theoretical rate of 5.79%. In summary, you can’t trust APRCs either.
What impact does the type of product have on the rate?
Simply put – massive. In simple terms, the longer the product the higher the rate. So, a five-year fixed rate is often more expensive than a two-year fixed rate. The current market leading two-year fixed rate is 1.05%, while the market leading five-year fixed rate is 1.44%. Is the two-year deal cheaper? Tough one, as that depends on what happens to interest rates. If, and this is a huge if, rates stay the same for the next five years, then a two-year deal would work out cheaper. But as money markets are very split on whether rates will go down before they go up, what represents best value? I don’t have the time to go into this here, but aspects such as your risk appetite and your timeline will be biggest factors in what is best for you aside from the rate charged. Even if a five-year deal presented best value, if you are planning on moving in two years that doesn’t make sense as you may have large exit fees to get out of the product, or be tied into the lender. The latter may not be an issue as long as you meet their lending criteria for the move. If not, you could be deemed a ‘mortgage prisoner’.
There are other factors I haven’t even touched on, such as the level of flexibility you need in a mortgage, if you want to link your savings or not, do you have a need to borrow more in a short space of time and so on. These are all really important factors that will drive you to the right product and lender, not just the ‘cheapest’.
Should I be concerned about the financial stability of the lender I go with?
Again, in a word – no! I would strongly suggest you read/watch Fight Club on this point. Spoiler Alert – The purpose of the story is to blow up the HQ’s of the leading credit card companies, hence wiping out the debt and giving people a fresh slate to work from. We don’t advocate that as sound financial planning, but in the extreme is does illustrate the point. If a company goes bust you owe them money, not the other way around! If you are talking savings and investments, completely different story. Your terms are protected under contract law: Northern Rock is a good example. The debt was nationalised and subsequently sold to Virgin Money. Ethics aside, that is the practice. So, should you worry about your lender’s stability? Not really. It isn’t a factor in our thinking as it will have no material impact on you.
As the above illustrates, it is a minefield out there and brokers have six times the choice that you will have if you research yourself. So if nothing else, check what you have been offer against what a broker has access to, as you may well end up with a more suitable product which will save you more money or allow you to achieve what you want to.
Should you wish to speak to any of our advisors, please feel free to contact us for a free initial conversation. You can contact any of the team here.
Find more of Richard’s advice on subjects such as how mortgage rates work and how much you can borrow for a mortgage on the Marsh & Parsons blog.
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