What Does A Mortgage Overall Cost For Comparison Mean?

mr_fishbulb

Say I've seen a fixed rate mortgage at 5% and the overall cost for comparison at 6%, how is that overall cost worked out and what does it mean?

Is this the figure I should be using to compare mortgages?

homer_j_3

It factors in all the fees and costs etc. It tries to make comparison much more simple.

The fact of the matter is that you can compare as many products as you want using this, however, you need to bear in mind that you may not be eligible for all of them so this can have bearing on your comparison.

Joe_Bloggs

This is a tricky area. It may well depend upon the comparison period involved. What often makes the APR percentage number higher in discounted mortgages is the time over which the comparison is made. Lets say 5% fixed for five years on a 25 year term mortgage. After 5 years the fixed rate becomes 6.3% SVR for the remaining 20 years. Then overall for 25 year term the rate quoted as 6%. The most favourable term for comparison would be just before the SVR kicked in.

It may make financial sense to remortgage to a lower rate after the initial discount period. That is if savings in reduced interest payments overtake the extra fees for remortgaging in a certain time period.

If the time period for comparison is quite short then initial setup fees would be the dominant factor in comparing two mortgages of similar interest rates. Some mortgages give cash back! This does tend to skew many short term comparisons in favour of these lenders even though there rates are often higher.
J_B.

mr_fishbulb

Thanks guys. I'll have to look at all the factors then as this comparison seems a little unreliable if they are not all using the same time frames.

Joe_Bloggs

The site https://www.moneyfacts.co.uk has a true cost over a variable selected period and seven other ranking methods based on measures of value.
One mortgages rebated 11% back to the borrower. This came top as having the least true cost over 2 to 5 year term. The interest rate was 7% the cost per £ borrowed was £2.0. Many of the lowest APR rates are for low interest rate trackers for the full term and have cost per £ of around £1.73. These mortgages may have other features that are more or less useful depending on circumstances so you have to research the features , terms and conditions.
If you don't know what features are available you won't know what to consider.
J_B.