Compare mortgages by “Total Cost” for an accurate appraisal
What is the best way to compare mortgages?
There are two main methods of comparing mortgages:
- Initial Interest Rate
- Total cost
In this article I’ll explain them. Just so you know at Niche Advice our default choice is “Total Cost” but every client has different needs so it’s advisable to talk this through with your Mortgage Advisor.
Initial Interest Rate
This looks at initial rate you will pay in the Product Benefit period. It is easy to understand the concept and a research list will rank them from lowest initial rate to highest. If there are two lenders offering the same rate you might want to sort the ranking further by looking at the exact length of the benefit period. For instance, one Mortgage Lender might offer a two year fixed rate that ends in March and another in May. Normally the longer the fixed period the more preferential but it will come down you your individual requirements.
The method does NOT factor in the set up costs associated with the mortgage so it is a fairly blunt measure.
This method factors in the interest rates but also includes the set up costs too. There are a variety of fixed costs or incentives that may be applied to a mortgage:
- Completion Fee
- Application Fee
- Higher Lending Charge
- Valuation Fee (including incentive for valuation refunds or free valuation)
- CHAPS Fee
There are also variable incentives for which “Total Cost” method will apply a set assumption on:
- Free legal service
There may are also charges for redeeming the mortgages:
- Early repayment charge
- Deeds Release Fee
- Mortgage Discharge Fee
“Total Cost” analysis is normally completed over the benefit period. For example, if the product is a 5 year fix analysis would be made over 60 months. In can also calculate the interest charges on fees added onto the mortgage, for instance a Completion Fee added when the mortgage goes through.
The important thing to remember is initial rates are by design “headlines” often used to capture clients who do not look beyond the promotion. It could be the product is inferior so if interest rate is not your only consideration its worth looking at the “Total Cost”.