Don't dismiss fee-free mortgage deals

Fee-free mortgages come in for some flak for costing more in the long run, but they can be a cheap and practical option for many.

This article was first sent to readers as a '360 degrees' email.

Lenders are always on the lookout for tempting features and offers that make their deals stand out from the crowd. And while fees and charges have risen over the last few years, there has been a recent surge in fee-free mortgages set to tempt cash-poor homebuyers and remortgagors.

These mortgages come with no arrangement fee whatsoever, which can save you hundreds of pounds when you take out your homeloan, freeing up cash to cover Stamp Duty, other costs and charges or simply the expense of furnishing your home.

But fee-free deals get a bad press. They are criticised for being expensive and for drawing punters into mortgages that may be cheap upfront but that will cost you more over time, as the extra you pay each month wipes out any initial savings.

And this is a valid point. Many fee-free deals are more expensive than their fee-paying counterparts when you look at the total cost over a period of, say, two years, as Jane Baker explains in Don't be swayed by a fee-free mortgage.

But I believe that firstly, fee-free mortgages are not always that much more expensive -- there are currently some great value, newly launched fee-free deals that look competitive even when compared against the wider market.

Secondly, while working out your mortgage repayments based on 'total cost' is, in some ways, a useful way to do it, it is not infallible nor is it suitable for all borrowers. Frankly, it doesn't take into account real life, which tends to stubbornly get in the way of the theory. Indeed, the cheapest total cost of buying your home is to forget your mortgage altogether and pay with cash -not exactly practical!

Fee-free deals don't always cost more

I searched the major UK lenders for fee-free mortgages at different loan-to-value (LTV) ratios -- in other words for those with small and large deposits.

There are plenty of fee-free deals about and the rates are good.

Below are some of the best current fee-free mortgage deals:

Two-year fee-free fixed rates

*Available to Premier Current Account customers only

Three-year fee-free fixed rates

Five-year fee-free fixed rates

*Available to Premier Current Account customers only

Variable fee-free deals

It's fair to say that with most (but not all) of the fee-free deals above a cheaper fee-paying alternative can be found, when you look at the total costs over a specific period. To do this you add up the monthly repayment over a particular term -- say two years -- and then add on any fees and charges.

On this basis, fee-charging deals win out -- on paper. But we don't just take out mortgages on paper and in theory. We take them out in practice, and this is where I think fee-free can be useful.

True cost shortfalls

Working out the total cost of a mortgage simply isn't always the best way. For example, not all buyers have a surplus of upfront cash. Many of us save for our deposit, Stamp Duty and other costs and a massive arrangement fee is the last thing we want to fork out for. However we may have the income to take on a little extra with our monthly repayments each month.

So while somebody with a low income but a huge cash windfall might suit a high-fee, low-rate mortgage, a borrower with a healthy income but little cash might prefer a no-fee deal with a slightly higher rate.

This may not be the cheapest way or doing things when you look at overall cost over a subjective period, but it could well be the cheapest immediate solution for many borrowers.

After all, we don't all buy jumbo size versions of our household products just because it's cheaper in the long run. It's not practical in terms of space in our cupboards or our cash flow.

It's the same with mortgages. First-time buyers in particular may want to save their upfront cash for furnishing their new home rather than paying a whopping application fee.

'But lenders allow you to add the fee on to your mortgage?' some may argue.

This is true, and it's often a good practical option. But if that's the case you can't do the usual 'total cost' calculation based on the amount you initially agreed to borrow. Instead you need to work out your monthly repayments based on a higher level of borrowing that includes your application fee, as you will be paying interest on the fee as well as the rest of the money you borrow.

In addition, the size of your mortgage can have an impact on the size of fee you are able to 'swallow'. As a very rough rule of thumb, those taking out very large mortgages should focus on getting the lowest rate possible and those taking out tiny homeloans should keep an eye of the size of the fee.

Of course, it's horses for course with the current market and each borrower needs to do a thorough search of deals based on their exact specification. There is no such thing as the best mortgage and this has never been more true than in 2009. Do your homework or speak to an independent mortgage broker to help you navigate the restricted but still complicated market.

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