This Is Why You Should Pay More For Your Mortgage

We are obsessed with getting the cheapest interest rate, whether that's the lowest margin over the Bank of England base rate or the cheapest 2-year or 5-year fixed rate.

And, of course, we should be, especially at larger sums. A 20bps or 30bps (basis points, a unit of measurement used to describe changes in interest rates) difference can save hundreds or thousands of pounds a month in interest and even more over the lifetime of a mortgage. Given the price of eggs and cheese on Ocado or similar suppliers at the moment, the vast majority of us need to make sure we are as efficient as possible.

When presented with the "lowest rate" choice with an alternative, more expensive solution, many of our clients often choose the latter.

Here are the reasons why some people choose to pay more for a mortgage than they otherwise might have to:

Speed or certainty

In some circumstances, a fast mortgage approval or instant certainty of funds can be worth paying a little extra for.

Some lenders can produce lending terms incredibly quickly, and the application process can be efficient and fast. Other lenders may work more leisurely, have an involved credit or onboarding process, or are difficult to deal with.

Usually, but not exclusively, we find that the faster lenders are a little more expensive, and the ones with the best rates are slower or more rigid.

We always present both options, especially for those with a short timeline or window to deliver an outcome, and the first option is often the preferred, even if it's a bit more expensive.

Some people will happily pay a premium for speed and simplicity; the certainty of funds in short order can be incredibly valuable. Some will happily take a slightly more pricy option to minimise stress and admin.

Convenience and service

In practically all countries in which we operate, the mortgage market is more complex, involved, regulated, and admin-driven than ever before.

I regularly hear stories of how even the most straightforward of borrowers gets bogged down in process, admin and documents.

Similarly, I meet people who come up against a wall of problems when renewing a simple mortgage they have had with the same bank for decades. 

For both sets of people, those who have been frustrated by the mortgage process in particular, the offer of a bank that will treat them like a person, take a sensible approach to their borrowing needs, have a slick and efficient process and then outstanding customer service after completion is more than compelling. This is often worth paying a premium for.

For example, we have a few private banks in London who will meet a borrower in person, understand their needs, and then present terms pleasantly. Yes, they will still need to see your bank statements and will ask questions about your finances, but it won't be a dreadful process; you will get a cup of tea and a biscuit with them along the way, and if you have a question, problem or further need getting to a solution, they will only be a phone call (with a person) away.

How much more would you pay for that when compared to sitting on hold, listening to some dodgy hold music for an hour only to be told that the 177th letter of your password is incorrect, so you will have to call back when you are trying to do nothing else than update your direct debit manage.

Leverage and loans to values

The cheapest mortgage rates come at a low loan-to-value (LTV) 60% or so. The higher the loan-to-value curve you go, the higher the interest rate. A 99% LTV mortgage, for example, is around 6%.

It's very often the case that borrowing a higher amount and moving into a higher loan-to-value bracket with a higher interest rate is worth it.

• Borrowing more to reduce how much you take in dividends from your company
• Borrowing more to save having to liquidate an investment
• Borrowing more to give more time to sell an asset
• Borrowing more to keep more cash available for a refurbishment or other project
• And so on

The difference in interest rates between a 60 or 70% LTV mortgage can be marginal, but the benefit to your winder planning can be huge.

Short term need

Borrowing for a short duration is often more efficiently done by opting for a higher interest rate solution over a lower, longer-term mortgage.

This is best illustrated by using a second-charge mortgage. For example;

Current first charge mortgage £1,000,000 at 4% per annum with a 3% exit penalty.

The client needs an additional £300,000 for 3 months.

Option one:

• Refinance the first charge, pay the exit penalty, and take a new mortgage with a higher interest rate

Option two:

• Second charge at 10% per annum with a 2% lender fee

The second charge here would cost £2,500 per month for 3 months plus a £6,000 fee - £13,500 in total (plus legal, valuation, and other fees).

On the other hand, replacing the first-charge mortgage would cost £30,000 in an exit penalty plus a higher lender fee and a potentially higher interest rate for the remainder of the term.

There are a huge number of examples similar to this, where a much higher short-term interest rate is far better than replacing a cheaper, lower-rate mortgage, even where there are no early repayment charges to pay.  

Other fees

A simple one to end on but still something that we see some fall into.

• Some lenders offer very low interest rates on mortgages but with high set-up or arrangement fees
• Some lenders have higher interest rates on the mortgage but with lower arrangement fees

Depending on the loan amount, duration, and other factors, either one could be better overall, the total costs have to be worked out to see which is better.

Many advisers will focus on the holy grail of the "best rate" and, in the process, will miss all the other things that might make a huge difference to the borrower.