Why the cheapest mortgage deal isn’t necessarily the right one

Kevin Roberts
Repossessions Continue To Increase Due To Economic Downturn
If the fees spiral into the thousands of pounds, it may be more cost effective in the long run to choose a deal with a modestly higher interest rate and lower fee (Source: Getty)

The Financial Conduct Authority’s report into the mortgage market found that around 30 per cent of borrowers were unable to see that they were eligible for a cheaper deal.

On average, these consumers paid around £550 per year more over the introductory period compared to the cheaper product.

But this poses a question: is the cheapest mortgage always the right mortgage?

With price comparison websites now well-established, some consumers have started to make important financial decisions based solely on price.

But while a decision between two retailers selling the same model of toaster, for example, is simple, such choices are far more difficult when it comes to the world of financial products. The cheapest insurance deals do not necessarily offer the best levels of cover, and the lowest mortgage rates may not be the best deal for a borrower’s circumstances.

The good fight

The mortgage market is both complex and diverse. While high street lenders may have the largest profiles, there is a raft of small and specialist lenders fighting for business.

Smaller building societies and specialist banks are often more flexible with their lending rules, and may offer a better fit for someone’s financial situation.

However, while some smaller lenders might offer competitive rates, many do not sell directly to consumers. Instead, they rely on the expertise of a mortgage adviser to access their range of products.

For consumers, this means that you can’t always see and compare all the options available.

Given that mortgage advisers have access to up to 10 times as many products than there are available through a high street lender, they should be able to find you a deal that is more suited to your circumstances than those offered by major lenders.

Indeed, self-employed borrowers or those with smaller deposits may need to look beyond the high street.

It is also important to remember that some lenders are vying for customers’ business in today’s competitive market, and might offer low rates to get customers on board.

But don’t be blinded by cheap deals, and make sure that the mortgage has features that are suitable for you.

More, more, mortgages

Everything is further complicated by the introduction of new types of mortgages.

And we are not just talking about first-time buyers either, because a new breed of mortgages are giving older borrowers more options which in some cases were non-existent. Equity release, for example, continues to grow in popularity, as older homeowners look to release cash from their property.

Consumer vulnerability is an important factor with these so-called “lifetime mortgages”, so it’s crucial that homeowners ensure that a deal gives them adequate protection.

Given the growing number of products, the world of mortgages can seem like a daunting prospect for the uninitiated.

Delve a little deeper

While some lenders will use broader definitions, it’s more challenging to find lenders that take into account a borrower’s specific circumstances. And a more suitable deal might have a slightly higher price attached.

Some lenders offering cheap rates might be slower to process applications – and a cheap deal is no use if delays mean you miss out on purchasing your dream home.

And while a mortgage may have a cheap headline rate, you also need to take the impact of fees into account.

If the fees spiral into the thousands of pounds, it may be more cost effective in the long run to choose a deal with a modestly higher interest rate and lower fee.

It’s also worth checking to see if the product has flexible payment options, if it is portable to another property, and if there are no early repayment charges, as it’s unlikely that the cheapest deal will offer these additional features.

A mortgage adviser can be a sounding board to help borrowers understand their long-term housing goals, rather than merely choosing the cheapest rate on the day. For example, a two-year fixed rate may look like the best deal at first glance, but if you’re not planning on moving, the security of a five-year loan might be better for your needs.

So, when next scanning the best-buy tables, it’s important to remember to delve a little deeper. While the lowest rates may seem the most attractive on the surface, the right mortgage may not necessarily be the cheapest.