MORTGAGE lenders are battling for business, with several major banks now offering rates below 4% as competition intensifies.
Earlier this month, Coventry Building Society and Barclays led the way by launching sub-4% deals, triggering a wave of similar offers from other lenders.
Nationwide, Halifax, NatWest, and MPowered Mortgages have since introduced rates as low as 3.89% on two- and five-year fixed deals at 60% loan-to-value (LTV).
This surge in competitive pricing is driven by falling swap rates and growing expectations that the Bank of England will cut its base rate further due to global economic uncertainty.
However, while falling rates may seem promising for prospective homeowners and those looking to remortgage, a low headline rate doesn’t always guarantee the best deal.
Brokers warn that hidden fees and charges can quickly offset any potential savings, potentially leaving borrowers with a higher overall cost than expected.
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Mark Harris, chief executive of mortgage broker SPF Private Clients, says: “It is often said that there is no such thing as a free lunch and that is certainly the case when it comes to mortgage fees.
“There is often a trade-off between rate and fee and/or benefits received on a particular mortgage and the overall cost of taking that loan out.
“Products with lower interest rates (resulting in cheaper monthly payments) often come with a larger fee and no other incentives. Conversely, products with bigger fees often tend to have cheaper rates.”
For example, NatWest currently offers a two-year fixed mortgage at 3.94% with a £1,495 fee, or a slightly higher rate of 3.99% with a £995 fee.
With a £200,000 mortgage, the 3.94% deal actually ends up costing more overall than the 3.99% option.
This is because the small monthly saving with the lower rate doesn’t make up for the £500 higher fee.
The difference is just £5.51 a month, amounting to £132 over two years – not enough to offset the extra upfront cost.
However, with a larger mortgage, such as £800,000, the lower rate becomes more cost-effective.
The monthly savings in this case add up to £22.04, totalling nearly £530 over two years, which makes the higher fee worthwhile.
This shows that a higher fee can be better value, but only for larger loan amounts.
David Hollingworth, associate director at L&C Mortgages, said: “Borrowers with a smaller mortgage should always consider whether a deal without a fee could work out better for them despite a higher rate, rather than being drawn by the lure of a lower interest rate.
“Fortunately most lenders will offer a range of different fee and rate combinations, so borrowers can get the right fit for their needs.
“The downside is that it can create a confusing array of deals, which is where an adviser can help focus in on the right option.”
There are also several handy online calculators available to help you compare mortgage products by assessing both the monthly payments and overall costs.
How much can I borrow?
A MORTGAGE affordability calculator helps determine how much you can borrow.
It uses your income and expenses to estimate the maximum loan you can afford.
Thes calculators consider your gross income, including salary, bonuses, and other income sources.
It also takes into account your monthly outgoings, such as bills, debt repayments, and living expenses.
By analysing your income and expenses, the calculator estimates your disposable income.
It then uses this information, along with current interest rates, to calculate the maximum mortgage you can realistically afford.
Some calculators also consider your credit score and debt-to-income ratio.
Banks, lenders, broker websites, and price comparison platforms all provide these convenient online tools.
How can I compare monthly mortgage costs?
Mortgage calculators can help you compare the total cost of two different mortgages.
They allow you to input key details like loan amount, term, and interest rate for each mortgage.
You can then compare the monthly payments and total interest paid over the loan term for both mortgages.
Calculators also let you factor in additional fees and incentives to get a more accurate comparison of the overall cost.
This helps you determine which mortgage offers better value, even if the interest rates are similar.
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MoneySavingExpert.com’s Ultimate Mortgage Calculator can help you do this in minutes.
Just enter the details of the mortgage products by visiting moneysavingexpert.com/mortgages/compare-mortgage-rates.
How to get the best deal on your mortgage
IF you’re looking for a traditional type of mortgage, getting the best rates depends entirely on what’s available at any given time.
There are several ways to land the best deal.
Usually the larger the deposit you have the lower the rate you can get.
If you’re remortgaging and your loan-to-value ratio (LTV) has changed, you’ll get access to better rates than before.
Your LTV will go down if your outstanding mortgage is lower and/or your home’s value is higher.
A change to your credit score or a better salary could also help you access better rates.
And if you’re nearing the end of a fixed deal soon it’s worth looking for new deals now.
You can lock in current deals sometimes up to six months before your current deal ends.
Leaving a fixed deal early will usually come with an early exit fee, so you want to avoid this extra cost.
But depending on the cost and how much you could save by switching versus sticking, it could be worth paying to leave the deal – but compare the costs first.
To find the best deal use a mortgage comparison tool to see what’s available.
You can also go to a mortgage broker who can compare a much larger range of deals for you.
Some will charge an extra fee but there are plenty who give advice for free and get paid only on commission from the lender.
You’ll also need to factor in fees for the mortgage, though some have no fees at all.
You can add the fee – sometimes more than £1,000 – to the cost of the mortgage, but be aware that means you’ll pay interest on it and so will cost more in the long term.
You can use a mortgage calculator to see how much you could borrow.
Remember you’ll have to pass the lender’s strict eligibility criteria too, which will include affordability checks and looking at your credit file.
You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips, passports and bank statements.