We note some interesting research this morning from consumer champion Which? - they have just released quite worrying research indicating that 99.5 per cent of people do not understand the true cost of mortgages.
Which? polled 1,001 homeowners and homebuyers and found borrowers were clueless about how fees made a difference to the total cost and focused on headline rates.
It asked interviewees 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 five people, or 0.5 per cent, correctly ranked all five mortgage deals in the right order, and just 27 per cent could identify the cheapest and most expensive deals, despite half claiming they found the test easy.
A total of 30 per cent of people who have remortgaged, a quarter of people who had bought their first home in the past five years and 22 per cent) of potential homebuyers could correctly ranked the cheapest and most expensive mortgages,
The consumer champion says the number of arrangement fees has risen dramatically in recent times. Of the 28,000 mortgage deals on the market, 22,680, or 81 per cent, have set-up fees.
Moneyfacts data shows mortgage arrangement fees have risen by around 66 per cent to an average of £1,506 in the past two years.
The consumer champion says the rise in fees in the last two years means lenders should be more transparent about the full costs.
Advice
Buying a mortgage is the biggest financial commitments anyone will make in their lives so it is important to get it right.
In the last two years rates have plummeted but fees have rocketed to compensate lenders. As Which? Shows this leads to confusion among borrowers.
This research shows the importance for people to look beyond the best buys in newspapers and to overall costs of a deal.
The worst aspect of the research is perhaps that half of those polled believed the test was easy showing just how confusing mortgages have become.
One solution is to speak to your mortgage broker and take independent advice about the best deal on the market.
Brokers can talk borrowers through the complexities of a deal and explain the impact of arrangement fees and whether the headline deal is value for money.
From next April every mortgage sold in the UK will need to be advised as the financial regulator, the Financial Conduct Authority, recognises the difficulties of understanding mortgages.
It means borrowers will receive mortgage advice when they go into a branch instead of the current situation where they are merely handed information and asked to choose a deal without assistance.
The Which? Study highlights mortgages are growing increasingly complex with many not understanding the annual percentage rate.
The EU is imposing a new rule for all lenders to introduce a second APR showing the impact of interest rate fluctuations over five years.
Many argue that such information overload can lead to even more confusion about what a deal actually costs.
Many factors
The reality is that mortgages have to be tailored to individuals so hugh fees may be appropriate for one person while a cheap rate may suit another.
It depends on the size of the loan, length of the deal, financial circumstances and economic climate as well as Bank of England interest rates.
There are many factors to consider to taking advice or getting to grips with the details is absolutely essential because as Which? demonstrates most people think it's easy but, in reality, don't understand.
