Pay nothing for your mortgage!

Is a fee-free deal gold dust or gimmick?

 Mortgages are an expensive business, and just when you think you have budgeted for every last expense another hidden extra pops up. Your bank account will inevitably haemorrhage cash as you go through the homebuying process, so it makes sense to try to limit the expenses wherever you can.

Taking a fee-free mortgage is one such option, and with average fees hovering just under the £1,000 mark it’s a worthwhile saving to make at a time when money is often tight.

Footloose and fee-free

A mortgage fee is what the lender charges you to arrange the deal. Of course they charge you throughout the entire mortgage term by means of the interest you pay on your borrowing, but as a little extra they take an upfront sum.

At least they usually do.

However, some lenders offer a range of fee-free mortgages that do exactly what they say on the tin -- you pay nothing up front for them. This usually only means there is no ‘arrangement fee’. It may or may not be the case that you have to pay a valuation fee and/or legal fees, although certain remortgage deals will waive these too.

So, if most deals come with fees of nearly a grand yet others offer you a mortgage for free, why on earth doesn’t everyone get a fee-free deal. It’s a no-brainer right?

Well, not necessarily.

Swings and roundabouts

The general rule of thumb with fee-free deals is that they are more expensive than mortgages that charge a fee.

In fact, it’s not just a rule of thumb, it’s supported by the stats. According to financial information provider Moneyfacts the average fee-free fixed mortgage rate is currently 5.31% compared to 4.97% for fee-paying mortgages.

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Variable rates also follow this trend. The average fee-free variable rate is 3.90% compared to 3.68% for average fee-paying variable mortgages.

So if you get a fee-free deal you will normally pay a higher rate of interest, which stands to reason really.

Lenders use rates and fees to come up with an overall mortgage package. Both are pricing mechanisms that allow them to develop a range of deals, offering more choice to consumers.

The key thing to remember is that the market has changed massively in this respect over the last decade. It wasn’t long ago that all mortgage fees were more or less the same and pretty cheap at that, costing a couple of hundred quid. Today the mortgage arrangement fee is a key point of difference, which means you must never compare deals on rate alone.

This was brought home to me recently when a friend who is planning to buy her first home chatted to me about mortgages. Straightaway she said she wanted a mortgage without a fee, because it would save her money. But she had no idea that the lender may offset that free fee by imposing a higher rate than she could get elsewhere, and that in the longer term she could pay more.

Count the cost

All this highlights the need to work out total cost whenever you compare mortgages, which must include the arrangement fee as well as the monthly mortgage repayments. If your deal comes with cashback you should also take this into account.

To work out the total cost over a set period -- such as 24 months for a two-year fixed rate -- follow this simple calculation.

• Multiply the monthly repayment by the number of months you are assessing

• Add on any mortgage arrangement fee

• Subtract any cashback.

That’s your total cost. Alternatively, when you compare deals using lovemoney.com’s innovative mortgage tool you can see the total cost of each deal and set it over whatever time period you want to compare. So there’s no need to get your calculator out at all.

Right for you

Related goal

Cut your mortgage costs and pay off your mortgage early

Find out how to cut the cost of your mortgage by hundreds of pounds a month and become mortgage-free years earlier.

Do this goal

Working out the total cost of a deal is a brilliant way to compare mortgages but remember that sometimes the cheapest deal isn’t actually the best for your circumstances.

Fee-free mortgages suit specific types of buyers, particularly first-time buyers, because they take away the added expense of a fee at the time you can least afford it. You may pay a higher rate of interest, or even a higher total cost, but for some buyers that’s a premium they are willing to pay to save the expense of a fee when they have moving costs and furniture to fork out for.

Of course, most lenders will let you add the arrangement fee onto your loan, but beware you will be paying interest on that amount over the long term, which could end up costing you even more.

Fee-free boom

Despite fee-free mortgages being on average more expensive than their fee-paying counterparts, if you look closely you will see some real gems hidden in the mortgage tables. These are fee-free deals that also come with highly competitive mortgage rates. In other words, not only do they hold their own against the wider market on rate, they also charge no arrangement fee whatsoever.

So you really can have your cake and eat it!

Below are some of my favourite fee-free deals, across a range of deposit bands. In addition, and while not strictly fee-free, it’s worth taking a look at First Direct’s current range. The rates are keen and, as part of a special summer offer, all fees are £99. Not quite fee-free but almost!

 14 fantastic fee-free deals

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