Comparing mortgage deals when buying a property

The lender or mortgage broker must give you a ‘key facts illustration’ telling you the basic facts about any mortgage product they’re offering you. You can compare them to work out which deal suits you best.

When you come to compare different mortgage deals from different lenders, it is almost impossible to work out how they compare because they all offer something different. This where the APR — the Annual Percentage Rate — can help you. It looks like an interest rate – and the interest rate is the major component – but it also takes into account other ‘hidden’ factors of a loan which affect how much it really costs you. For example, if you have to pay an up-front fee for the loan or take out mortgage indemnity insurance, this adds substantially to the overall cost of the loan and will push up the APR. Every loan proposal has to show its APR and it is always calculated the same way, so it is a good way to compare deals. The lower the APR, the better the deal overall.

Comparing lenders’ standard variable rates can also give you a rough and ready way of telling which lenders are offering the best deals. One good rule of thumb is how close a lender’s standard variable rate is to the Bank of England base rate. The standard variable rate is the ‘no-frills’ basic rate of interest the lender charges.

Once you start looking at fixed rate, discount rate, and other loan deals it is hard to see the wood for the trees. But if you can see that a lender is trying to extract a wider margin of profit on its standard variable rate than other lenders, it’s a fair indication that they are probably doing the same on their more complicated products where it’s less easy to spot. So, a lender who keeps its standard variable rate fairly close to the Bank of England base rate is always worth considering.

You may come across references to ‘CAT marked’ mortgages. ‘CAT’ stands for cost, access and terms, and it is a kind of government approval of the product. It is not generally regarded as a particularly useful criterion.