A mortgage is the biggest financial commitment you are likely to ever make yet lenders are being criticised for making it needlessly difficult for customers to find the best deals. Last month the Financial Conduct Authority (FCA), the UK's financial services regulator, launched a review of the mortgage market with the aim of checking if competition is benefiting borrowers.
One area it will be studying is whether the deals that top the "best buy" tables are genuinely the best options for customers. Critics argue that banks manipulate the best buy tables by cutting interest rates in order to top the tables, then counteracting these low rates with high fees which could mean the buyer ends up paying more in the long run.
The FCA is right to take a hard look at the best buy tables "because you can see how lenders play the game", says Ray Boulger of broker John Charcol in the Financial Times. "Most of them should be called lowest rate tables."
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For example, Yorkshire Building Society is top of the tables at the moment, with a two-year fixed mortgage rate of 1.21%. Not so obviously shown on the tables is a £1,495 product fee. Further down the best buy table is Santander's offering at 1.23% with a £995 fee. Over two years, Santander's mortgage would actually work out cheaper for a typical borrower, despite the higher interest rate.
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While the FCA investigates the market, a new spate of mortgage deals offering cashback have been launched to further confuse borrowers. Virgin Money and TSB are just two of the lenders currently trying to tempt customers by offeringup to £1,000 in cashback when they take out a mortgage. However, just as the tables can be misleading, it's important not to be swayed solely by cashback or other incentives, such as free legal advice, when choosing a mortgage product.
As you might expect, these offers can often suger-coat an uncompetitive deal. "You may find the mortgage costs you more in the long run," says Jonathan Harris, director of mortgage broker Anderson Harris on ThisIsMoney.co.uk, "and you would have been better off opting for a cheaper rate perhaps with no cash back."
How to work out if you're getting the best deal
Don't get distracted by the headline rate or an alluring advert. There are several mortgages at the moment that offer tempting incentives to draw you in. But to get an accurate idea of the cost of the deal, you need to factor in all fees over the long term.
For example, Virgin Money is offering £1,000 cashback on its two-year fixed-rate mortgage, which has a rate of 2.84% and no fees. Yorkshire Building Society is offering a two-year fix with a rate of 1.21%, a £1,495 fee and no cashback. Which is the better deal? One way to estimate it out is via a mortgage calculator such as MoneySavingExpert's.
Set the length of the mortgage to two years (the initial fixed-rate period) and the type of mortgage to interest only (because you'll repay very little of the capital over two years) and it will reveal that a £115,000 mortgage with Yorkshire will cost about £2,300 less than Virgin mortgage over two years. Even with the cashback factored in, it is £1,300 cheaper.
Make sure that you have taken into account all fees that will be tacked on to the product, including arrangement, mortgage valuation and insurance fees. You may have the option to pay your mortgage fees upfront or to add them on to your loan. Doing the latter will result in you paying extra interest. Make sure you have at least thought about what you'll do when any initial cheap rate finishes. If you're struggling with the choices and calculations, you may want to use a mortgage broker to find the best loan. If you pay the broker directly, they may charge you a fee of around £500, but they could save you more than this in the long run.
In the news this week...
The case of Arnold Rosen's pension fund is a salutary tale about the "excessive profit margins" and opaque charges of the financial services industry, says Ali Hussain in The Times. The paper's Money section intervened after Rosen, a retired solicitor, couldn't work out the charges on his investments with wealth manager St James's Place (SJP).
It turned out that the charges on his fund, which had grown from £280,000 to £391,490 between 2009 and 2015, had amounted to £39,175 around 35% of the growth. More than £3,000 of that amount went to financial services provider James Hay Partnership for "administering the rump" of his former self-invested personal pension, even though Rosen could have actually closed the account for £95.
SJP is the only one of the UK's ten largest pension fund providers that does not set out its pension fund charges online, says Hussain. Instead, they are disclosed "only at face-to-face meetings" with clients. SJP customers "fork out" 1.68% a year on average, excluding introductory charges and exit penalties (the firm charges a fee of up to 6% on any portion of savings that clients want to withdraw within six years of investing, for example). Plenty of other firms charge smaller ongoing fees, as well as less for upfront advice and switching. Candid Financial Advice, for example, charges just 0.75%.
Britain's biggest four banks Barclays, Lloyds, HSBC and Natwest/RBS were rated worst for customer satisfaction in a recent Which? poll of 5,000 members, says Andrew Ellson in The Times. They also rated worst for hidden fees and charges. The internet bank, First Direct, which is owned by HSBC, came out on top with an overall customer rating of 85% and five stars in six categories. It was followed by Nationwide and TSB.
Although the research found that many banks were improving their online and mobile offering, a surprising report by Accenture finds that what Generation Z (those aged 18-21) really values is face-to-face service, says Emma Dunkley in the Financial Times. Generation Z use their bank branch more regularly than other age group, and the numbers visiting for monthly financial advice is on the rise.
