The interest rate on offer is the first variable that most borrowers look to when deciding which mortgage lender to approach. But potential borrowers should remember that the interest rate is not the end of the story by any means.
In many ways, just as important is the APR (annual percentage rate), as well as the cost per thousand, both of which are shown in the mortgage table (left). But as well as these key financial elements there are many other variables that borrowers should look at, including the lender's general history for having rates among the lowest or the highest. Of course the type of borrower whom lenders are trying to target is also different and borrowers can find themselves being turned down by one lender only to be welcomed with open arms by another.
The standard variable rate is the rate which the lender charges and is the most commonly used guide. The problem is that in some circumstances that can be more complicated, and the cheapest rate does not mean the cheapest APR.
The APR attempts to calculate the rate likely to be payable over the lifetime of the loan. That means that for discount or fixed-rate loans it also includes the impact of paying at the standard variable rate at the end of the term.
As a result, while both AIB and Bank of Ireland have one-year fixed rates for new business at 5.6 per cent, the APRs are different. Bank of Ireland's APR is 5.7 per cent while AIB's is 5.17 per cent , reflecting AIB's lower standard variable rate. The standard variable from AIB is 4.99 per cent while Bank of Ireland's is 5.6 per cent. Both loans cost £6.92 per thousand, as this does not change until the end of the fixed term.
Looking at the cost per thousand is the easiest way to work out which rate is best and what you can afford. For example, if you went for a variable rate with AIB you would pay £499 for a £100,000 mortgage based on a 4.99 per cent rate. However, if you wanted certainty you would have to pay £635 a month for the same loan, based on AIB's 6.35 per cent rate for a three-year fixed rate loan. Only the individual can decide if that additional monthly repayment is worth the security.
One good way of progressing is to see if the lender offers a different rate to new customers than to existing customers. Many have an introductory one year offer and that is valid. But different rates over longer terms or on the standard variable could spell trouble for the new borrower once he is an existing customer.
If you want a fixed rate it may not be appropriate to simply go for the cheapest. Many of the lenders have different policies about repayments. Some charge the so-called breakage cost - that is, the cost to the institution of getting out of its fixed rate commitments on the money markets. The bigger the difference between the rate when you took out the loan, and the current rate, the bigger the charge.
Other lenders charge a standard three or six months interest no matter whether they have lost money on the transaction or not. So if there is even a chance that you could inherit money or be paid a bonus that you may wish to use to pay off your loans it is worthwhile checking this out.
Other issues worth looking at are the payment of indemnity insurance which some lenders will pay for you as well as the method of calculation of mortgage interest.
But there is also a broad range of other areas which it can pay a borrower to look at. These range from policy on penalties for getting out of fixed rates, to payment of indemnity insurance to how the lender actually calculates mortgage interest that you will pay.
The mortgage indemnity is essentially insurance that customers pay to cover the lender in the event of severe downturn in the housing market.
How the banks calculate mortgage interest is also extremely important. The best way is to have it calculated daily and applied monthly or quarterly. This means that any extra payments you make are immediately credited and reduce your mortgage. Other lenders calculate this on a monthly basis and one at least on a yearly basis. That means that any additional money put in during the year is not counted until the end, which could have a very negative impact on the borrower.
