The lowest two-year fixed rate currently available is from Principality Building Society at 2.24 per cent but it has a three per cent arrangement fee. Someone borrowing £150k will end up paying a total of £20,302.56* over the two-year fixed term. By comparison, if that borrower took HSBC’s a two-year fixed deal at 2.89 per cent they would pay just £17,116.92 over the term because, despite the higher rate, the fee on this product is just £99. That’s a saving of £3,185.64.
Further analysis of the top two-year fixed mortgage deals demonstrates the extent to which headline rates can be misleading for consumers when taking out a new product. For example, an ING Direct customer borrowing £250,000 on its two-year fixed deal at 2.79 per cent would pay £28,991.16, including a £945 arrangement fee. Someone borrowing the same amount on Principality’s two-year fixed deal would end up paying £33,837.36 almost £5,000 more.
Clare Francis, site editor at moneysupermarket.com, said; "When it comes to looking for a mortgage, borrowers mustn’t be blinded by attractive looking headline rates. It’s vital to factor in the impact of the arrangement fees as these charges often mean a deal isn’t quite as good as it first appears. Charging high fees enables lenders to showcase extremely low rates without missing out on profit and it’s clear that some of the current best buy products have been released for marketing impact, rather than real borrower benefit.
"The size of the arrangement fee plays a huge part in the overall cost of a mortgage. That’s not to say a high fee is never worth paying – it all depends on how much you are looking to borrow. Those looking to take out a large mortgage may find it is worth paying a high fee in order to secure the lowest interest rate – but only if it is a flat fee. Mortgage products with percentage fees rarely prove to offer best value.
"The key when looking around for a mortgage is to calculate the total cost over the term of the deal – it’s the only way for a borrower to identify which product will be best value for their circumstances."
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