Stop believing the lies about mortgage fees

No one wants to pay their lender a large one-off sum just for the privilege of getting a deal, but are small arrangement fees really a better option?

In the old days you could choose a mortgage based on the interest rate -- usually the lower the better. Sure, there was a fee on top, but it was only a couple of hundred quid and it didn’t vary much between lenders.

But in the last few years these arrangement fees rocketed, to an average of £1,211 a pop at their peak in January 2009, according to financial information provider Moneyfacts.

At this level it’s not surprising that fees have become a big point of difference between deals. Now it’s essential that you take them into account when you choose your mortgage, as a steep fee can wipe out the benefits of a cheap interest rate.

But since their peak average arrangement fees have fallen back to an average of £933 now -- still steep of course but at least a bit lower. In addition, many lenders have launched low-fee or fee-free options to their ranges.

Indeed, last week Yorkshire Bank announced it was cutting the arrangement fees on a whole range of its mortgages by 50%, as well as chopping its contents insurance costs by the same proportion. The reduced arrangement fees -- now £499 -- apply to new customers moving home or remortgaging, on a range of 14 different mortgages including fixeds, discounts and offset deals.

Local rival Yorkshire Building Society has some pretty nifty fee-free deals of its own for first-time buyers, including some at market-leading rates with £500 cashback on completion.

In fact, cheap fees and fee-free mortgages abound in the current mortgage market, from small societies like Leek United to goliaths like Santander.

But are they any good?

Do your sums

Any deal that charges you a lower fee than others on the market is going to look attractive, but look again at the rate. If you end up paying a premium on rate just to benefit from a cheap fee, you may end up paying more overall.

This is where working out the total cost of any deal is essential, because it lets you compare mortgages on a like-for-like basis. To do this you need to work out your monthly repayment for a particular deal and multiply it by the number of months you are assessing. If you are after a two-year fix, for example, multiply by 24 months. Then add on the arrangement fee and subtract any cashback offers to find out the total you will actually pay over two years. Don’t worry if your maths is rusty, lovemoney.com’s innovative mortgage tool will show you the total cost on any deal, over the time period you choose.

Doing this will show you that sometimes it is worth paying a slightly higher fee to bag a cheaper rate, while in other circumstances the cheap fee deal works out better, even if the rate is slightly higher than you can get elsewhere.

In other words, it's not as simple as low-fee: good, high-fee: bad. So, the next time you see a mortgage lender adveristing how wonderful its fee-free, high rate mortgage is or you read an article in the papers slating a high-fee, low-rate mortgage, you'll know better.

• Watch this video: Sort out your mortgage online video

Received wisdom

Of course, there has long been a choice of high fees and low fees and received wisdom tells us that lenders hike up the arrangement fees on their cheapest rates, and add a little to the rates on those deals where they offer cheap fees. It’s classic ‘robbing Peter to pay Paul’, although to be fair to lenders I would argue that having these two different pricing mechanisms allows them to offer more choice.

After all, some people’s personal and financial circumstances mean a low fee makes a lot more sense for them, even if they end up paying more each month for their mortgage.

Say you have very little upfront cash, because you have put down as much as possible as a deposit, and you need some for Stamp Duty and furniture -- first-time buyers often fit into this category. You may have exhausted your cash supply but perhaps you have a decent wage that is due to go up in the next few years (a trainee lawyer perhaps). For you it might be a better option to go for a low fee deal that charges slightly more on the interest rate, because you can afford the ongoing costs -- you just don’t have much money now.

The flipside of this is someone who has a modest income and needs to minimise their monthly repayments, but perhaps has just come into an inheritance, so can afford a large upfront fee at the outset.

It’s worth pointing out that fees can usually be added to the mortgage instead of being paid upfront, but that will result in you paying interest on them, so they will cost you more in the long-run.

• Read this blog: Is now a good time to buy for first-time buyers?

Whole new ball game

And there is another important factor to note. It might be the case that a small fee is traditionally offset by a steep interest rate, but lots of the current best buy mortgage rates come with a temptingly low fee as well.

Indeed many of the low-fee and fee-free mortgages below are market-leaders (or thereabouts) in their own right, even when compared to high-fee deals.

The fact is, if you really do your homework you can have your cake and eat it. A low-fee, low-rate mortgage suits every borrower, large or small mortgage, cash rich or not.

15 deals with cheap fees and low rates

14 Fab fee-free deals

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