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Should you choose a fee-free mortgage?

By Emma Lunn 22.05.2012

Fee-free mortgages can seem very attractive as they come without the sometimes off-putting upfront fees. But are they as good as they seem?

Mortgage lenders are trying to tempt homeowners and buyers through their doors by offering deals that waive mortgage fees. Mortgage fees can take a large chunk out of your budget so choosing a fee-free mortgage could potentially save you a lot of money.

But are fee-free mortgages really as good as they seem?

With many other mortgages, arrangement fees regularly run into four figures. Although some lenders charge fees of between £500 and £999, a handful of lenders have arrangement fees of more than £2,000. In return, borrowers are offered the best rates.

Buy-to-let (BTL) mortgages in particular often come with the highest fees – you could be looking at as much as £2,500.

Don't be blinded by fee-free offers. They're not always the cheapest.  Borrowers need to do their sums carefully before choosing a mortgage.

Do the maths

You may not expect it, but in some cases a fee-free deal can work out to be more expensive over the term of the mortgage than a deal with a fee attached. However, in other circumstances the opposite is true.

When comparing deals, borrowers therefore need to work out the total cost over the length of any tied-in period, so for a two-year fixed deal this will be two years. This involves working out the monthly payment, multiplying it by 24 and then adding on the fee. Our mortgage calculator will help.

EXAMPLE – when the fee-free deal is more expensive

If you go for NatWest's fee-free two-year fix at 3.35% at 60% loan-to-value (LTV) and take out a £200,000 mortgage, you will pay £23,640 over two years based on a 25-year term on a repayment basis.

But if you choose HSBC's two-year fix at 2.64% with a huge £1,999 fee, also available at 60% LTV, you will pay £23,863, so that's £223 less.

As a rule, for large mortgages the rate is more important than the fee. However, there is no particular cut-off point for when the fee becomes less important.

Watch out for this trick

Most lenders will give borrowers the option to add any fee to the loan amount. However, bear in mind that if you do this you'll be paying interest on the fee amount over the whole length of the mortgage, which is rarely a good idea.

Paying interest of just 3% on £1,500 over a 25-year term would add more than £2,100 to your total interest bill. A borrower would be better off paying the upfront fee with a 0% purchase credit card and paying it off during the interest-free period, than adding it to the home loan.

Right now, the most competitive 0% purchase credit card is the Nationwide Select Card which offers 18 months interest-free spending. But you need to be a Nationwide current account customer to qualify. Alternatively, Tesco Clubcard Credit Card offers 16 months interest-free - just ensure you do pay off the full balance before the 0% period is up.

Borrowers also need to bear in mind that lenders don't just charge arrangement fees. Many also charge booking, valuation and legal fees too. All of these need to be taken into account when working out the best deal and total costs.

As well as upfront fees, borrowers can be asked to pay a redemption or exit fee once the mortgage is paid off. This can be several hundred pounds so it's worth checking at the application stage. A good broker can advise you about fees and how they affect the total overall cost of your mortgage. You can talk to one of our fee-free brokers at mortgagecase.com.

Finally, bear in mind that lenders offered some of their cheapest mortgage deals last year, making homeowners' monthly mortgage repayments in 2011 the most affordable in ten years, according to Barclays. So even if you're opting for a mortgage with a fee attached, you're still likely to be getting one of the most competitive deals we've seen in a decade.

  1. Quick tips

  2. Fee-free isn't always best or cheapest

  3. Don't fall for the headline rate
  4. Be sure to budget for all extra costs and fees
If your mortgage has a fee, avoid adding it to your mortgage otherwise you will pay interest on that as well

Top tips For taking out a mortgage

Don't add your fee to your mortgage

You'll pay interest on the fee too making it even more expensive in the end

Use a credit card

If you can't pay your mortgage fee upfront, use a 0% purchase credit card – clear the balance before the interest-free deal ends

Do the maths

Every situation is different so always compare deals carefully

Overpay

Once you have a mortgage, overpay if you can– you'll save money and pay your mortgage off faster

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