Opinion: First Direct's mortgage fee cut doesn't make it more honest

The lender has cut fees rather than rates across its mortgage range. But does that make it more honest than those with higher fees and lower?

First Direct has halved the booking and arrangement fees on its range of two- and five-year fixed rate mortgages, but increased rates by up to 0.2%.

It’s an unusual move in the mortgage price war as lenders have been locked into a race to the bottom on rates while upfront fees have been steadily rising to protect profit margins.

First Direct has flipped this trend on its head following feedback from customers that said they would prefer lower upfront costs.

The lender is known for offering some of the lowest mortgage rates around but the product fees on its cheapest deals were as high as £1,450. Now, the fees are just £725 and there is a new range of fee-free deals to boot.

But will the change mean you get a better deal?

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The new First Direct deals

Here’s what the new range of First Direct mortgages offers and how the rates have been tinkered with to offset the change in fee.

First Direct has also revised its fee-free mortgage range and actually reduced the rates on these deals. Here’s what they look like now,

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Are you really getting a better deal?

Upfront costs on mortgages have been catching borrowers out for a while now.

Many of us aren’t prepared for them and will add them onto what we borrow which means the banks make even more money.

So does First Direct’s move actually save borrowers money? We've compared the old and new 60% LTV two-year fixed rate deal to find out.

On the old 1.14%, two-year fixed rate deal that came with a £1,450 fee, a £150,000 mortgage taken out over 25 years would cost £574.87 a month if the fee is paid separately or £580.42 if added to the loan.

Over the two-year term of the deal that means you would pay £15,2246.78 if paying the fee separately or £13,930.14 if you added the fee to the loan.

With the new 1.24% price with a £725 fee, the monthly payments on a £150,000 mortgage would be higher at £581.75 (£584.75 if you add the fee to the mortgage) and over the two-year term that amounts to £14,687.10 or £14,029.58 if the fee is added to the loan.

So, borrowers will pay less over the two-year term of the 1.24% deal if they pay the fee upfront but not if they add the fee to their loan as the rate they pay back is higher. So First Direct isn't any more honest than other lenders who offset the other way.

Nick Harrison, of First Direct, said: 'We always aim to offer outstanding customer value, and customers have told us they’d prefer fee-free or lower upfront fees with their mortgage so we’re acting on this. 

'There’ll be some rate changes to accommodate this, but it will help provide an even more attractive proposition to customers looking to remortgage or purchase their first home.'

Fee-free deals are the way forward

First Direct deserves some praise for making the move to lower fees. But it’s no more honest than lenders that are charging low rates with high fees as the costs are still being offset in the rate.

While reducing upfront fees is a step in the right direction, the tinkering means First Direct doesn’t lose out and we’re still struggling to compare costs effectively and save money.

Fee-free deals should be the norm, with borrowers only having to compare rates rather than using calculators to compare the actual cost of the deal

What do you think? Share your thoughts below.

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