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Cost conundrum

Which? research shows 99.5 per cent of people do not understand the total cost of mortgage deals

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Mortgage rates have fallen dramatically in the last two years but arrangement fees have rocketed leaving many borrowers oblivious to the true cost of mortgage deals.

Two-year fixed rate deals at 60 per cent loan to value are regularly below 2 per cent, with five-year fixes under 3 per cent and even 10-year fixes selling for less than 4 per cent.

But Moneyfacts data shows arrangement fees have rocketed 66 per cent to an average of £1,506 in the past two years.

Which? research published last week shows the depth of confusion among consumers, with 99.5 per cent of the people surveyed unable to understand the real cost of two-year fixed rate deals.

The study asked 1,001 homeowners and homebuyers to rank five two-year fixed rate mortgages in order of total cost over the two years based on a £100,000 loan, including monthly payments and fees.

Only five people, or 0.5 per cent, correctly ranked all five mortgage deals. Just 27 per cent could identify the cheapest and most expensive deals despite half saying they found the test easy.

Only 30 per cent of people who have remortgaged, 25 per cent of those who have bought their first home in the past five years and 22 per cent of potential buyers correctly ranked the cheapest and most expensive mortgages.

Another Which? survey shows 52 per cent of people believe the headline rate is important, while only 29 per cent identified total cost as important. In its 2013 risk outlook, the Financial Conduct Authority warned about the impact of headline rates and the use of comparison sites.

Which? is calling for the APR to be reformed and for lenders to make mortgage costs more transparent so borrowers can more easily compare deals.

Council of Mortgage Lenders head of member and external relations Sue Anderson says the key facts illustration sets out different options in detail.

The KFI currently only shows the APR which calculates the average cost over the total mortgage and not the fixed or variable rate introductory offer.

Anderson says: “Consumers do not, in real life, have to make their choices based on the very limited information that Which? used to gauge consumer awareness and capability to decide on which loan represented the cheapest option.”

Liberal Democrat MP for Eastleigh and former mortgage broker Mike Thornton agrees Which? should have been clear that lenders have no choice in how they disclose interest and fees under the KFI.

He says: “Lenders may want to be clearer but at the moment they are unable to do so because of the KFI. For any complicated purchase most people do not know what is going on without advice.

“The APR has never been clear to anybody. Very few people will stay with one mortgage for 25 years so it does not affect many people.

“The KFI should be changed to show not just the APR but the total cost over a two-year period. The damaging thing about the KFI is it only shows the full term and over 25 years a £2,000 fee does not look nearly as bad as it does over two years.

“It should also show the total cost over a two year deal and then say if you had no arrangement fee then this would be your equivalent interest rate. It should be on the front page along with your monthly cost.”

Mortgage Advice Bureau head of lending Brian Murphy says: “People are given a lot of information already and they still struggle to make a decision but they should not be expected to as they are not experts. It is why more people should seek advice and not just look at headline rates.”

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