Research from Which? found that 99.5% where unable to identify which loan would be best because the costs involved are not easy to understand. It also pointed out that only 19% of 2,800 mortgages that it analysed did not have any kind of set up fee.
People were asked to rank five two year fixed rate mortgages in order of total cost over the two years, including monthly repayment charges and arrangement fees, based on borrowing £100,000.
Only 0.5% correctly ranked all five mortgage deals in the correct order, and only 27% could identify the cheapest and most expensive deals, despite 49% saying that they found the test easy.
Only 30% people who have remortgaged and 25% of people who had bought their first home in the past five years, correctly ranked the cheapest and most expensive mortgages, compared with 22% of potential home buyers.
The watchdog says that comparing mortgages based on interest rates alone may not give an overall indication of the best deal because it does not reflect the overall cost of a mortgage. Depending on how much they plan to borrow and the length of the deal, some people may be better off choosing a mortgage with low set up fees and a higher interest rate.
Yet, in a separate survey, just 29% of people who took out a mortgage recently said the total cost is important compared to 52% who said the headline interest rate was important.
Which? wants all lenders to display the total cost of mortgages clearly to make it easier for consumers to compare and for the industry to explore alternatives to APR in the mortgage market.
It is also seeking reassurance from the lenders that fees reflect the true cost to lenders. It says that there is no clear sign that set up costs have increased for lenders but arrangement fees have spiralled in the past years. Increasing arrangement fees not only makes it more expensive to switch but can damage competition.
‘While it’s good to see lenders now offering lower interest rates, mortgage arrangement fees have risen dramatically in the last two years making it increasingly important for borrowers to understand the overall cost. Our research shows that even people who already have a mortgage struggle to recognise the cheapest deal,’ said Which? executive director, Richard Lloyd.
‘Lenders should be more transparent about the true cost of mortgages so that borrowers can more easily compare deals and find the best one for them,’ he added.
Even after you have taken out a mortgage, people can still face a range of charges from storing house deeds to fees for being in arrears or even for overpaying. These fees can vary widely depending on the lender.
For example, Ipswich Building Society charges £35 for a bounced cheque or failed direct debit, whereas Norwich and Peterborough Building Society charges just £5 and £2 respectively. And 27% of lenders charge no admin fees when closing down a mortgage, whereas some will charge up to £195 to send the deeds.
Which? believes there should be more transparency around post sale fees and for charges and penalties to reflect lenders’ actual costs.
The mortgage process includes a number of checks and balances to try to ensure that consumers understand the whole picture of the rate, fees, charges, and total costs and characteristics of the mortgage they eventually choose, according to Sue Anderson, head of member and external relations at the Council of Mortgage Lenders.
‘The compulsory key facts illustration (KFI) sets these out in detail, based on the customer's individual circumstances and consumers can obtain as many different KFIs on different mortgage deals as they want to before deciding which to apply for,’ she explained.
‘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. The more important issue that the Which? data reveals is the limitations of the APR. Although the APR is a useful tool, it cannot be used in isolation from the other important disclosures about cost,’ she said.
‘Which? asked consumers to rate the deals on offer only for cost over the period of the special deal. The APR, on the other hand, is designed as a comparison tool for the long term cost of the mortgage,’ she added.
