Pay nothing for a cracking mortgage deal!

These cut-price mortgage fees could save you a fortune.

There’s something that sticks in the craw about a whopping mortgage fee and UK borrowers are certainly not keen on them. Indeed many a lovemoney.com reader has ranted about lenders’ rip-off charges.

So it’s no surprise that since First Direct cut its mortgage fees to just £99 for the summer it has seen applications surge as a result. So much so that the lender has had to employ more staff to cope with the demand.

Northern Rock joined the sub-£100 fee party last Friday, announcing it was to chop its arrangement fees to just £99. But by Tuesday it admitted it was having to postpone the reduction due to a ‘system error’ and all mortgage fees would remain at £250 until it has sorted the problem. Oh dear. The lender did say it would honour the £99 fee for those quick enough to have applied for a mortgage on Monday 23rd August -- the day in between the first announcement and the postponement.

The Rock may have cocked up its reduced fee offer but the fact that it launched one in the first place shows it is actively touting for business. Because there’s nothing a mortgage borrower likes more than a cut-price mortgage fee.

But are we right to put so much focus on the size of this charge?

Money for nothing?

Mortgage arrangement fees may seem like money for virtually nothing. After all, the lender is in the business of lending, and wants us to take one of its deals, so why is it also charging us for the privilege, on top of the interest rate?

It’s a reasonable viewpoint and while most people can just about accept a fee of a few hundred pounds, it’s difficult to stomach the fact that the average mortgage arrangement fee is currently £879, according to financial information provider Moneyfacts.

However, I think that high fees are completely justified, as I argued in Why mortgage fees are fair.

The fee is just one part of the lender’s pricing structure and cannot be taken in isolation. You need to look at the rate too and then work out the total cost over the time period you are looking at -- such as 24 months for a two-year fixed rate.

It is often the case that the deals with the highest fees have the most competitive rates, and it is a general rule of thumb that low fee or fee-free deals often come with slightly higher rates. Lenders use these two levers -- fee and rate -- to come up with an overall deal.

And this choice can be useful. For example, if you are borrowing a relatively small amount, say £100,000 or less, the interest rate will not make as much difference to your monthly repayments as it would if you borrowed a jumbo £400,000 mortgage.

In general, the larger your mortgage the more important it is to go for a low rate, even if you have to pay a large fee to bag it. If your mortgage is modest the fee will impact hugely on your overall cost so best to look for low fee deals.

Of course, it always makes sense to work out the total cost depending on your specific circumstances.

And just to confuse matters, in the current mortgage market there are low fee and fee-free deals that completely turn that concept on its head.

Topsy turvy

The current crop of low-fee and fee-free deals come with temptingly low rates, and are the exceptions that prove the rule.

For example, First Direct’s summer fee sale means that its already low mortgage rates now all come with a tiny fee of £99. The lender hasn’t hiked its interest rates to accommodate this offer on fees -- it’s just a temporary reduction that makes its deals extremely appealing.

Another lender to offer low fee options is HSBC, with a cracking special offer of a 2.19% term tracker (Base + 1.69) with a £99 fee -- although you do need a 40% deposit for this mortgage and you’ll need to move quick as it’s a temporary deal.

There are even some great options for those who don’t want to pay any fee at all. ING Direct’s 2-year discount at 2.6% for those with a 30% deposit easily holds its own on rate, and comes with absolutely no fee.

As always, you must look at the total cost when you are comparing mortgages. If you use lovemoney.com’s innovative mortgage tool it does the hard work for you, illustrating the total cost, including fee and rate, over the time period of your choice.

Or you could get free independent mortgage advice from lovemoney.com’s professional mortgage brokers, and they will do the sums for you!

Below are some of the best low-free deals and fee-free mortgages available. For the low-fee options I used a cut-off of £500, but some best buy HSBC deals only just missed out, as they have fees of £599, and are well worth a look.

22 low fee deals (fees under £500)

15 top fee-free mortgages

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.