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Mortgage costs – how to compare mortgages

Mortgages are complicated products, with a lot to take into account, making it difficult to compare between them. But, you can compare the cost of different mortgages by looking at monthly repayments.

Of course, in reality it’s more complicated to compare mortgages than simply looking at monthly repayments, as you’ll need to examine fees, interest rates and more. To help you get a handle on it, we explain a few of the things you need to know below.

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Mortgage offer or deal

Your mortgage offer or deal is the actual mortgage ‘product’ you actually apply for and take out. It refers to the total package of rates, fees, discounts and other incentives that come with a mortgage, as well as any obligations you have.

Whilst a mortgage product is theoretically for the duration of its entire term (normally around 25 years for a new mortgage – it can be less, but will rarely be longer), a “mortgage deal” refers to the a shorter discounted period, which is typically between two to ten years.

This deal will tie you in to some extent with early repayment charges to discourage you from exiting until the period comes to end.

Mortgage fees

There are many fees you’ll need to pay to take out a mortgage, but for comparison the main fees to look at are:

  • Booking fee
  • Application fee
  • Valuation fee

These will often be the largest fees related to the mortgage and you will either need to pay them upfront, or add them to the cost of your mortgage deal.

It’s also worth taking into account any early repayment fees, as these will apply if you try to remortgage before your deal ends, as well as also possibly being levied on any overpayments you make.

Interest rates

The interest rate is how much it costs to borrow money. It is expressed as an annual percentage rate that will be applied to the amount of money you owe.

For example if your interest rate was 2% and you owed £100,000, you would need to pay £2,000 in interest over the year. It goes without the saying the lower this rate, the cheaper it is to borrow money.

However, to make matters more complicated, this interest will be charged at a monthly rate and compounded (meaning you pay interest on interest).

But, at the same time you will be making monthly repayments on the amount borrowed (unless you have an interest only mortgage), so the amount of money you pay to cover mortgage interest will gradually fall.

Initial rate of interest

The initial rate on a mortgage is the rate you will pay for the duration of your deal. This may also be referred to as a the discounted period. It typically lasts two, three, five or ten years, though other periods may be available.

There are three main types of initial rate:

  • Fixed – Your rate will remain at the same level for the duration of your deal.
  • Discounted variable – This is a discount on the lender’s SVR (see below), if the lender’s SVR goes up or down so will your mortgage rate, but your discount will remain the same.
    For example let’s say your mortgage rate is 1.5%, which is a 2% discount on the lender’s SVR of 3.5%, If your lender’s SVR fell to 3%, your mortgage rate would fall to 1% as
  • Tracker mortgage – a tracker mortgage will follow the base rate of the Bank of England with a set margin added on.
    For example if the base rate is 0.5% and your tracker mortgage is base rate +1.5%, you would pay a rate of 2%, but if the base rate rose to 0.75%, you would pay a rate of 2.25%.

It’s also worth noting that not every mortgage will come with an initial rate or discounted period, some offer a variable rate for the duration of the mortgage, though these mortgages are less common.

Reversion rate – Standard Variable Rate (SVR)

After your deal ends you will revert to your lender’s Standard Variable Rate (SVR). This is a lender’s base rate of interest that all of their mortgages will be in some way based on.

Lenders will alter their SVR at their discretion, with rates influenced by a number of factors:

  • The base of interest set by the Bank of England, and other government and central bank measures to restrict or encourage lending.
  • Market competition between different banks and mortgage lenders.
  • The stability of the economy and the number of foreclosures in the housing market.
  • The price of money, credit and securities are traded at. As expressed in financial indexes such as the London Inter-Bank Offered Rate (LIBOR) or swap rates.

So whilst no-one can predict the future, it’s worth keeping an eye on rates and the headlines around the economy to plan your mortgage costs.

APRC

APRC stands for the Annual Percentage Rate of Charge, it is an interest rate meant to reflect the whole cost of a mortgage for every year of its term, including any fees.

The figure was introduced after EU consumer regulation changes in 2016 sought to give mortgage customers a single and consistent number to compare mortgage costs with.

However bear in mind it is only an estimate, as mortgage rates are likely to fluctuate throughout the lifetime of your mortgage and this figure also doesn’t reflect that you’ll likely remortgage to a new deal once your discounted or fixed rate period has ended.

Repayment term

This is how long you will take to fully repay your mortgage and is agreed upfront. Note that the longer this is, the more your mortgage will cost you.

The traditional term for a new mortgage is 25 years, but you should be able to make your mortgage shorter than this. Also, you may be obliged to have a shorter mortgage term, depending on your age (typically lenders won’t allow to still be repaying a mortgage over the age of 75).

You may also be able to get a longer mortgage term, but this is more unusual. The advantage of longer term is lower monthly repayments, but note that this makes your mortgage more expensive in the long term.

Monthly repayment

Your monthly repayment is how much you need to pay towards your mortgage each month. It includes interest as well “capital payments” which go towards paying off the amount you’ve borrowed.

Your payments will vary with the amount of interest you pay throughout your mortgage. If your interest rates rise you will pay more and vice versa. Though as the amount you owe gradually reduces, the proportion of your monthly repayment going on interest will shrink.

Monthly repayments are a good way to compare the cost of a mortgage as you can compare your monthly costs, but remember to take upfront fees into account when comparing mortgages.

Cashback incentives

Some lenders offer you a cashback incentive for taking out a mortgage. This will usually be paid  on completion of your application. A typical amount is between £200 and £1000, but this will vary between lenders.

Despite being a relatively small amount when compared to a total cost of a mortgage and fees, it’s worth taking this into account when comparing mortgages.

How to work out the total cost of a mortgage

To work out how much a mortgage will cost you takes a little bit of mathematical skill.

You need to deduct monthly repayments from the total amount you borrow, then calculate the amount of interest that will be added to the debt each month. This can be calculated by applying a monthly interest rate to your mortgage total.

Once you know how much interest is being added each month, you simply need to cumulatively total it up for the number of months in your mortgage.

For example, the graph below shows how much a £200,000 mortgage would cost over its 25 year lifetime. It assumes a two year discounted rate of 2%, before returning to a 4% SVR.

total cost of mortgage

‘Soft’ factors

As well as thinking about the hard cold cash and quantifiable points of comparison, it’s worth thinking about the ‘softer’ qualified points of a mortgage, in essence, customer service.

Think about whether you’d like to do business over the phone or have a branch to visit, read about the reputation of different banks and lenders, and try to find one that offers a level of service you think you’d like.

It’s not easy to find an answer for this, and ultimately you’ll just have to go with your gut and anecdotes, but it’s worth thinking about nonetheless.

Read more…

  • Mortgage terminology – Understanding all the jargon and terminology used to describe the various elements mortgages can be confusing for first time buyers, but it’s worth taking a little time to learn the jargon before you apply.
  • How many different types of mortgage are there? – There are many different types of mortgages to suit a variety of circumstances and people, so it’s important to do your research and compare the mortgage market.

Compare mortgages with uSwitch

Compare mortgages if you're remortgaging, a first-time buyer, looking for a buy-to-let or moving home

Compare mortgages