Forty per cent of mortgage products are now fee-free, according to data released this week – but simply taking a no-fee mortgage rather than considering the overall cost could leave you overpaying by £100s a year.
The number of fee-free mortgages currently on offer has risen by 274 since January to a total of 2,007, up 4% on this time last year, new figures from data firm Moneyfacts reveal.
But as well as a mortgage’s fee, other aspects affect its cost – such as its interest rate and your deposit or existing equity. While our Mortgage Best Buys comparison tool allows you to search for fee-free mortgages, crucially it also shows the total cost, allowing you to compare fee-free mortgages against those with a fee to ensure you’re getting the cheapest deal possible.
See our Cheap Mortgage Finding guide on how to find the right deal for you.
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Why has the number of fee-free mortgages increased?
Lenders are serving up fee-free mortgages as a means to attract more customers, wary of cutting interest rates to new borrowers as the base rate – the interest rate at which the Bank of England lends money – is predicted to rise from 0.5% next Thursday. This, in turn, will see swap rates rise, therefore impacting the mortgage market.
In fact, interest rates have been on the rise since the last base rate increase in November 2017, with the best two-year fix now available at 1.43% (up from 0.99% in October 2017) – though it has a hefty £1,700 fee.
Without the cheapest rate to attract new borrowers, lenders have turned to fee-free mortgages. These could slash a chunk off your overall payments and save you serious cash, depending on the size of your mortgage.
David Hollingworth of top mortgage broker London & Country says: “Lenders increasingly recognise that borrowers may not want to, or be well served by paying arrangement fees and other set up costs. Whilst headline rate is clearly important its crucial to factor in all the costs, to make sure you get the best overall value.”
Make sure you factor in the overall cost
A fee-free mortgage may sound a no-brainer – especially when Moneyfacts’ data shows lenders have upped the average fee from £979 in May to £990. But it’s not that simple.
Unfortunately, fee-free often means a higher interest rate (the lenders have to make up the money somehow), meaning you could end up paying more than you need to each month if you incorporate the fee into your monthly payments.
To show how mortgage costs compare, we looked at a spectrum of two-year fixes on a £200,000 property with a 75% loan to value (LTV), ie, the percentage of the property value you’re borrowing – in this example, £150,000. The fees ranged from zero to £2,034.