Find out how to compare mortgage deals, taking into account the initial rate, follow-on rate, APRC and fees.
Trying to compare mortgages can be confusing.
When you compare other credit products, such as a loan, you’ll usually be shown the interest rate as an annual percentage rate (APR).
The APR is a percentage that expresses the annual cost of the loan, including any fees or other costs.
For example, if you have a £10,000 loan with a 5% APR, that means interest and other costs will add up to £500 each year for the duration of the loan.
This makes it simple to compare products, as you just need to look for the lowest APR.
But mortgages are different.
When you look at mortgage rates, you’ll be confronted with three different figures, the initial deal rate, the follow-on rate and the annual percentage rate of charge (APRC).
These deals are for a set length of time, with two-year and five-year deals being the most common, although three-year, 10-year and other length deals are also available.
The interest rate quoted for the initial period only applies during this time and doesn’t include any fees.
Once your initial mortgage rate ends, you’ll usually be moved onto your lender’s standard variable rate (SVR), sometimes referred to as the follow-on rate.
If the follow-on rate is higher than the initial deal rate, this means your monthly repayments will increase.
Because of this, you might want to speak to a mortgage adviser before the initial deal ends to help you compare mortgages and switch to a new deal.
It takes into account the initial rate, all fees and charges and the follow-on rate.
It then calculates a percentage which tells you how much the mortgage would cost you each year if you were to stick with the same product until your mortgage is fully repaid.
However, this means it’s of limited use for many mortgage customers, as most people won’t stay with the same mortgage product or provider for the full life of the loan.
In fact, it’s a good idea to compare deals each time your initial rate comes to an end and switch to a more competitive deal if necessary.
To work out the best mortgage deal, you should compare the rate during the initial term, but don’t forget to take the fees into account.
You might want to chat with a mortgage adviser to calculate the cost of the initial deal - fees included - to work out which products offer you the best value.
There’s not just the rate to consider, either.
Make sure you think about what type of mortgage will be most suitable for your situation and what length of deal is appropriate for you, be that two years or 10 years.
Look into whether features like the ability to overpay your mortgage or switch deals without penalty are important to you.
Consider whether a product that can be ‘ported’ if you choose to move house would be appropriate, too.
A mortgage adviser will be able to guide you towards products that fit both your situation now and your future plans, while offering you the best value.