Summer's an expensive time of year. So the last thing any of us want to spend our hard-earned cash on is a mortgage fee...
Summer's an expensive time of year. There are holidays to pay for, weddings to go to and barbecues to host.
So the last thing any of us want to spend our hard-earned cash on is a mortgage fee.
Especially because, with the credit crunch hitting mortgage lenders hard, rates are going up. That means, if you're shopping around for a new mortgage this month, you may find it more expensive -- and more time-consuming -- than you expected.
For all these reasons, fee-free mortgage deals seem very attractive right now. You don't have to cough up that huge upfront fee - often as much as £999 nowadays - and that makes it much easier to compare the different (fee-free) deals. You can simply look at the rate and decide which is the cheapest.
But are fee-free deals really as good as they look? Are you better off going for a deal with a high fee and a lower rate? And how can you compare a fee-free deal with a deal that does have a fee?
Low Rates, High Fees
In today's difficult economic climate, lenders are being overwhelmed with demand for the best deals - which means these are being pulled fast. So you have to act quickly to get the cheapest rate.
So first, let's look at the deals with the lowest rates. All of them have fees, ranging from £649 to £1,999.
Lender | Rate | Min. Deposit | Fee | Interest Payable Over Lifetime of Mortgage* | Early Repayment Charge |
|---|---|---|---|---|---|
HSBC | 5.43% Discounted Variable for 2 years (0.82% disc) | 10% | £999 | £257,790 | First 2 years: 2/1% of sum repaid |
BARNSLEY BUILDING SOCIETY | 5.69% Discounted Variable for 2 years (1.50% disc) | 15% | £750 | £259,079 | First 2 years: discount reclaimed |
ING DIRECT | 5.69% Fixed to 31/08/2010 | 25% | £1,999 | £262,015 | To 21/08/2010: 1.5% of outstanding balance |
MANSFIELD BUILDING SOCIETY** | 5.7% Fixed for 2 years | 25% | £999 | £260,322 | First 2 years: 2% of mortgage advance |
LOUGH-BOROUGH BUILDING SOCIETY | 5.75% Fixed for 2 years | 10% | £649 | £259,869 | First 2 years: 5% of mortgage advance |
*First two years at rate shown; next 23 years at industry average Standard Variable Rate of 7%. To keep things simple, I have assumed borrower takes out an interest-only mortgage and adds the fee to the loan. ***Max loan £200,000 and only available direct.
The first point to make is that this table was generated for a borrower with a £150,000 mortgage -- so bear in mind that if you are borrowing significantly more or less than this amount, the top deals for you may be different.
As you can see, this table is complicated and can be confusing. The fifth-ranked deal, from Loughborough Building Society, has a higher rate (5.75%) than the ING Direct deal (5.69%), but because Loughborough's fee is only £649, compared to ING's whopping £1,999 fee, then the Loughborough deal actually works out £2,453 cheaper over the lifetime of the mortgage.
This calculation assumes that, like many borrowers, you have chosen to add the fee to the mortgage. This makes the fee `interest-bearing', so you end up paying interest on the fee for the term of the mortgage -- 25 years, in this case.
If, however, you paid the fees upfront, then you would actually be £250 better off over the long-term if you went for the ING Direct deal over the Loughborough deal, because it has the lower rate.
This demonstrates just how difficult it can be to judge the costs of deals with different rates and different fees.
Work It Out
If you want to compare deals with different rates and different fees, then for each deal you should:
1. Multiply the monthly payments by the number of months the deal lasted for. So if it was a two-year fixed rate, multiply the monthly payments by 24.
2. Add on the fees.
3. Divide this sub-total by the number of years the deal lasts for. So if it was a two-year fixed rate, divide it by two.
4. This gives you the cost per year of each deal, including the fees.
5. Sounds like hard work? Alternatively, you can speak to a broker who will figure out the costs of each deal for you.
Fee-free deals
The good news is, there are deals out there which are much simpler to compare, because you don't need to take into account the fee - because there isn't one!
At the time of writing, these were the best two-year deals available with no fees, for a borrower with a £150,000 mortgage.
Top 2 year deals with no fees
Lender | Rate | Minimum Deposit | Fee | Interest Over Lifetime of Mortgage* | Early Repayment Charge |
|---|---|---|---|---|---|
NATIONWIDE BUILDING SOCIETY | 6.35% Fixed for 2 years | 25% | £0 | £260,550 | First 2 years: 1.5% of outstanding balance |
NATIONWIDE BUILDING SOCIETY | 6.55% Fixed for 2 years | 10% | £0 | £261,150 | First 2 years: 1.5% of outstanding balance |
SCARBOROUGH BUILDING SOCIETY | 6.84% Variable for 2 years | 20% | £0 | £262,020 | First 2 years: 3/2% of sum repaid |
NOTTINGHAM BUILDING SOCIETY | 6.89% Variable for 2 years | 20% | £0 | £262,170 | First 2 years: 2% of outstanding balance |
ALLIANCE & LEICESTER | 6.94% Fixed to 31/07/2010 | 25% | £0 | £262,320 | to 31/7/10: 3%of sum repaid |
*First two years calculated at rate shown; next 23 years at industry average Standard Variable Rate of 7%. To keep things simple, I have assumed borrower takes out an interest-only mortgage.
As you can see, this table is quite straightforward. The deal with the lowest rate costs you the least over time.
But overall, these deals are much more expensive than the cheapest deal from the first table, the 5.43% variable discounted deal from HSBC.
The only problem with this deal is that you don't have the option to add the £999 fee to the mortgage - you must pay it upfront. This helps to ensure it is the cheapest deal by an astounding £4,530 over the long-term, as you don't pay interest on the fee. But it also means you have to find a £999 pretty quickly - or reduce your borrowing by that sum.
The fact is, navigating the mortgage maze can prove extremely complicated - and, if you don't want to ask a broker to guide you through it, you may have to get the old spreadsheet out in order to work out which deal is truly the cheapest.
Not the most fun way to spend the summer, I admit, but it could save you a pretty penny...
Get fee-free mortgage advice from brokers at The Motley Fool's award-winning mortgage service.
NB: Only deals which are available nationwide were included in these tables. At the time of writing, there were some fantastic deals available from Cumberland Building Society and Mansfield Building Society but only to borrowers who live nearby.