What Should You Look for in a Headline Rate?

What gets your attention the instant you look into mortgage deal? The headline interest rate, of course. But does it tell the whole story? Unfortunately not.

What’s Most Important to You?

When you’re looking for a mortgage, there are certain aspects you need to consider: what rate you want, how long it will take to pay off the loan, and of course how much you need to borrow. You may have to think about what your priority is with the loan – to pay it off quickly, or to spread payments over time?

Whatever you see as the headline interest rate, you should also check the fees, costs and conditions that come with it to see the bigger picture. Here, we go over what you need to take into consideration…

Special Offer and Introductory Rates

There are mainly three products you will see when looking for a mortgage:

Fixed rate – usually for a duration of 2, 3 or 5 years, the rate will be fixed at a certain percentage and guaranteed not to change. Usually, this kind of deal is offered when there is concern across the industry that interest rates will soon rise. After the set term, your mortgage will then move to your lender’s standard variable rate (SVR) for the remainder of the term of the loan.

Discount rate – this will be a rate set to remain at a particular percentage (for example 1%) below the lender’s usual standard variable rate, again for a set period of 2-5 years. After this period, the rate will revert to the lender’s SVR.

Tracker rate – this will be set at a certain percentage above or below another rate that is not set by your lender – usually the Bank Of England base rate. Although you might often find that your lender’s SVR is linked in the same way, only likely at a slightly higher percentage.

During the offer period, you are usually locked in to the loan. If you wanted to switch provider or pay off the mortgage during this period, you would face early redemption charges, which usually make switching a mortgage during this time impractical.

Charges & Fees

Most mortgages come with fees and charges. There are fees for peripheral services – such as your solicitor, surveyor, etc – which are not controlled by the lender and not reflected in the mortgage deal.

There are also fees charged by the lender – a booking fee, arrangement fee, a reservation or product fee, and there may be bank transfer fees for releasing funds.

Arrangement fees may vary according to the interest rate being charged on the loan. Typically, a product with a lower interest rate will come with higher fees, and vice versa.

Again, you may also encounter charges for early repayment during the product period, or if you miss a payment.

What’s the APR Compared to the Interest Rate?

The annual percentage rate (APR) is a secondary figure you will often see quoted with the interest rate. The APR takes into account the fees charged on the loan as well as the interest rate, and expresses this as a percentage, to provide an easy comparison.

Put simply, the interest rate dictates what your monthly payments will be. If you’re only interested in low monthly payments, then this is the only figure you need to consider.

The APR reflects the total cost of the loan over time, and it will take a little maths to work out what that will mean in monetary terms at the end of the mortgage compared to the interest and fees charged on a lower rate.

The APR also assumes you will keep the mortgage for the duration of the term. If you switch mortgages, then there will be additional charges. Or you may move home and find you can either pay off some of your mortgage with a lump sum, or need to borrow more to fund a larger property. Both of which might change the sums again.

In the end, it’s about finding the balance between the interest rate and the fees around the mortgage. This is where an independent mortgage adviser can really help out and turn a mass of information into two or three clear options to help you decide.