Don't be swayed by fee-free mortgage deals

You might think a fee-free mortgage deal sounds like a great way to cut your costs, but it doesn't always do the trick.

When it comes to remortgaging, what do you look for? Are you swayed by a seemingly cheap deal with super low fees, perhaps? Or, maybe you're more seduced by a rock bottom interest rate?

It's all about true cost

The only way to guarantee you've found genuine value for money is to take the all the fees you'll have to pay and the rate into account. You'll also need to deduct any cashback or other incentives you might be offered. In other words, you'll need to look at the 'true cost' of a mortgage deal to work out if it really is competitive.

Take the selection of mortgages below, for example. The first table shows the true cost over a two-year period of the top six fee-free deals. Note that by fee-free I mean deals which don't charge a product or arrangement fee. They may, however, charge valuation and legal costs (although some don't).

The second table shows the true cost of top six deals with the lowest rates and shows the product fees for each one.

Let's take a look at how the two compare:

Top six fee-free remortgage deals by true cost

Source: Moneyfacts. Figures based on a £120,000 loan over 25 years. Deals of two years and over have been included only. Where legal fees apply an estimate of £500 has been used. (1) Includes £500 legal fees with £200 rebated. (2) Includes £100 valuation admin fee. (3) Includes £190 valuation fee. (4) Includes legal fees of £500 with £250 rebated.

Top six remortgage deals by rate

Figures based on a £120,000 loan over 25 years. Deals of two years and over have been included only. Where legal fees apply an estimate of £500 has been used.

As you can see, the cheapest fee-free deal is offered by Scottish Widows Bank with a total cost of £14,913. This figure includes monthly repayments over 24 months plus legal fees of £300 (calculated as an estimated cost of £500 with £200 rebated by Scottish Widows). No valuation costs are payable.

But fee-free doesn't necessarily mean good value with the true cost of the Abbey deal coming in at a far pricier £15,917 - that's an extra £1,004 on the most competitive no-fee deal.

Fee-free versus low rate

So how do the fee-free deals compare with the top home loans which charge fees, but tempt us with ultra low rates instead?

The lowest mortgage rate on the market is HSBC's two-year discounted variable deal at a tiny 2.49%. The total cost this time is significantly lower at £13,500. But then, in this case, HSBC charges a very reasonable product fee of just £249, a valuation fee of £140 and rebated legal costs that run to £100 or so on top of the monthly repayments.

This makes HSBC the most competitive deal around in terms of true cost and a whopping £1,413 cheaper than Scottish Widows. All you need to do then is decide whether you want a mortgage with a discounted variable rate. (And if you do, you'll also need to have at least 40% equity in your home to meet the 60% loan-to-value (LTV) requirement.)

When a low rate isn't best

But, it doesn't always follow that a mortgage with a low rate is good value for money. Take, for example, the mortgage with the second-lowest rate: Alliance & Leicester's two-year variable rate at 2.79%. Although the rate is highly competitive, it comes with a staggering product fee of £2,400 (or 2% of the mortgage loan).

This makes A&L the most expensive of all the deals shown with a true cost over two years of £16,057 even though it charges that tiny interest rate. Worse still, this deal would cost you £2,557 more than the HSBC deal. And it is pricier than all the fee-free deals shown.

Calculating true cost

So, how do you work out the true cost of a mortgage yourself? It's a pretty simple calculation. Let's say you want to know the true cost of an array of mortgage deals over a two-year term. This is all you need to do:

• Multiply the monthly repayments by 24
• Add on any product/arrangement/booking fees
• Add the valuation fee
• Add an estimate for legal costs
• Add any other fees (higher lending charges or other admin charges, for example)
• Deduct any cashback, incentives or other special offers

The figure you end up with is the true cost of the deal. Voila!

You can then use these calculations to find out which deal really is the best value, rather than falling for fee-free or low rate mortgages which could actually turn out to be pretty expensive.

Of course, if you're a first-time buyer or you're moving home rather than remortgaging, the same principle of true cost applies.

You can get advice on the best deal for you from our lovemoney.com mortgage brokers.

More: How to get the best mortgage | You can get a great mortgage with a low (ish) deposit