What’s lurking behind that headline rate?

Borrowers need to look at the overall cost of a mortgage before signing on the dotted line, according to moneysupermarket.com.

A new report warns that ‘percentage’ arrangement fees can add thousands to the overall cost of a mortgage. For example, this week Lloyds Banking Group launched a new tracker mortgage at just 1.49% above Base Rate, meaning it currently costs just 1.99% – seemingly a market leading rate. However, this deal has a fee of 3%, the highest percentage fee on a residential mortgage, adding an extra £4,500 to a £150,000 mortgage, bringing the ‘real’ rate of 4.33%.

This means the new Lloyds tracker product would cost an extra £2,600 over two years compared to Alliance & Leicester’s tracker mortgage at 2.49% with a flat fee of £995, while ING Direct’s two year fixed rate deal at 3.44% works out £1,176 cheaper as it carries a £595 fee.

Hannah-Mercedes Skenfield at moneysupermarket.com, said:

“Although we have started to see a welcome improvement in the mortgage market, with the number of products increasing, and rates starting to fall, we are still seeing some products being promoted for marketing impact, rather than real borrower benefit. Using high fees enables lenders to showcase extremely low rates without losing any of the profit.”

“The attraction of a mortgage deal with 1.99 per cent splashed across it should not tempt potential borrowers, as a three per cent arrangement fee means this deal is only ever likely to be the best option for you if you’re looking at a mortgage of less than £50,000.”

“The size of the arrangement fee plays an important part in the overall cost of a mortgage. A more expensive fee may well be worth paying in order to secure a low rate on a large mortgage, but only if that fee is a fixed amount. Mortgage products with percentage fees rarely stand up to those with flat fees, even if their rates are considerably lower.”