Don't pay a penny for your mortgage

Why pay £1,000 for a mortgage when you can get a decent one without a fee?

The past couple of weeks have seen a succession of new fee-free mortgage deals launched by lenders, large and small.

But are the mortgages any good? And is a fee-free mortgage really such a good idea?

Paying a fee

The concept of the mortgage product fee is a pretty irritating one for many borrowers. Just by taking out the mortgage, you are already committing to paying the lender a sizeable chunk of money – they are benefitting from the interest on the loan, after all. To have to pay a fee on top of that for the privilege does stick in the craw.

And these fees aren’t insignificant sums either. The average fee now stands in the region of £1,000. Even worse, many of us (and sadly I have to include myself in this) end up adding the fee to the mortgage sum itself, so we end up paying interest on it as well!

Why go fee-free?

When buying a property, money tends to be a bit stretch, particularly if you’re a first-time buyer. And while you can always add the fee to the mortgage, it’s not ideal.

However, you do have the option of going for a fee-free mortgage instead, one where you don’t have to pay a penny upfront.

The new deals

Let’s take a quick look at the new fee-free mortgages that have been launched.

First up, Coventry Building Society unveiled a couple of three-year fixed rate deals, one at 3.59% for those with a 35% deposit, and one at 3.79% for those with only 25% in equity.

The Post Office has launched a range of two-year fixed rate deals as well for borrowers with deposits of 15% (mortgage rate of 4.99%), 20% (mortgage rate of 4.25%) and 25% (mortgage rate of 3.48%).

And finally Santander has launched a two-year tracker mortgage, following base rate plus 2.79% (with a current rate of 3.29%) for borrowers with a 25% deposit. All of them feature highly in their respective best buy tables, which is terrific news for borrowers.

The catch

Inevitably, there does tend to be a slight catch with fee-free deals.

Usually the rate of interest on the mortgage will be somewhat higher than the market leading deals, so you’ll have to work out for yourself whether it’s best for your own circumstances to fork out £1,000 upfront for the sake of a better rate, or pay a little more interest on your mortgage to sidestep the fee.

How much more?

Of course, it’s one thing to pay a fraction more for the benefit of missing out on a product fee, quite another when it’s a sizeable jump.

Related blog post

• John Fitzsimons writes:

  The long-term vs short-term fixed mortgage dilemma

  Does it make more sense to go for a short-term fixed rate, and shop around for a cheaper deal in a couple of years, or secure a decent rate for the long term?

  Read this post

Let’s take a look at some examples.

The best fee-free two-year tracker at 75% loan-to-value comes from Barnsley Building Society, which carries a rate of 2.84%.

In terms of rate, you can do far better than that with Cheltenham and Gloucester, which offers a two-year tracker rate for borrowers with the same deposit at just 1.99%. However, there is a sting in the tail – the product fee is an incredible 2.5% of the loan. On a £150,000 mortgage, that’s a fee of £3,750! Ridiculous!

So either you fork over a massive fee at the outset of the mortgage (which could likely be better spent on furnishing the place), or you stick it on the top of your mortgage, simply adding to your debt.

Sadly, Cheltenham and Gloucester is not alone in charging laughable fees for such a deal, with numerous lenders including Lloyds and The Mortgage Works charging similarly punitive percentage application fees.

Are fixed rates any better?

Is this also the case with fixed rate deals?

HSBC offer a brilliant fee-free two-year fixed mortgage for borrowers with a deposit of 30%, at a rate of just 3.29%.

Recent question on this topic

• Paul Warburton asks:

  Buying the freehold

  • 
    SoftwareBear answered "Buy it ... I presume "we" means the company / residents that own leasehold to the flats. As opposed..."
  • 
    Paul Warburton answered "By 'we' I mean 'us' really - so myself and partner who own the leasehold on one of the flats. This..."
  • Read more answers

You can shave almost a full 1% from that rate by going to Principality Building Society, which offers a deal for borrowers with at least 25% in equity at 2.24%. However, the fee is an astronomical 3%!

In other words, a product fee of £4,000 on a £150,000 mortgage, for the sake of cutting your monthly repayments from £741 with the HSBC deal to £658 from Principality. Not really worth it, when you’ll only have to look for a new deal in two years, and most likely fork out another massive fee.

The happy medium

It would be wrong for me to say that you have a black and white choice between mortgages with astronomical fees and fee-free deals, as that is patently not the case. There are mortgages with far more reasonable fees in place. For example both HSBC and First Direct have whole ranges of mortgages available for a product fee of a paltry £99. For more on some of the amazing deals you can nab, albeit for a fee, be sure to check out Don't miss these market-leading mortgages!

Whichever type of deal you're currently looking at, however, it’s well worth doing a few sums to see how a fee-free deal could work for you. I’ve put together a few highlights in the tables below, while it’s also worth having a chat with our fee-free mortgage team, whether by phone, email or instant messenger over at our mortgage centre. 

10 fee-free fixed rates

10 fee-free variable deals

More: House prices double every 7 years? | 10 top tips for homebuyers!

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article. 

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.