Mortgage deals: how to get the best rate and avoid high fees

Cheap rates may look good value, but borrowers searching for the best deal should watch out for eight key fees that could eat into savings...
Remortgaging has surged as borrowers seek to take advantage of low fixed rates that offer interest savings running into thousands of pounds and protection against an eventual base rate rise. Many lenders have two-year deals at under two per cent for mortgages of up to 75 per cent of the value of a property.
 
But borrowers searching for the best deal should watch out for additional fees that eat into the interest savings.
 
The mortgage deals with the lowest headline rates often have high fees, which can make them much less competitive overall.  

Set-up fees of £2,000 or more on some loans mean borrowers may be better off choosing a loan with a higher interest rate but lower fees, say experts.
 
For example, the Post Office offers an ultra-low two-year fix at 1.15 per cent for mortgages of up to 60 per cent of a property’s value. But for many borrowers, a higher fixed rate of 1.59 per cent from Chelsea Building Society could work out substantially cheaper.  

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How lenders’ fees stack up
Mortgage account fee For setting up, maintaining and closing your mortgage account. If charged, there shouldn’t also be an exit fee. £100 to £300
Early repayment charge; Applies if you come out of the fixed-rate or discount period before it ends. One to five per cent of loan
Exit fee Also known as a mortgage completion or deeds release fee. For closing your mortgage account. £75 to £300
Arrangement fee Sometimes known as a product or completion fee. £0 to £2,000+
Valuation fee Varies with property value, often waived on remortgages. £150 to £1,500
Booking fee Application fee, generally non-refundable, which may be included in the arrangement fee. £99 to £250
Own buildings insurance fee Sometimes charged if you sort out your own buildings insurance, rather than buying from lender. £25
CHAPS fee For transferring mortgage funds to your solicitor. £25 to £50
Sources: Money Advice Service; MoneySuperMarket

The Post Office charges a hefty arrangement fee of £1,995 and borrowers also pay a valuation fee of hundreds of pounds, while there are no arrangement or valuation fees with the Chelsea offer.
 
Even with its higher rate, the overall cost of the Chelsea deal would be about £1,000 lower over the two-year fixed-rate period for a £250,000 repayment loan, according to calculations by financial website MoneySavingExpert.com.
 
Financial adviser Justin Modray, of Candid Money, warns that lenders can use up-front fees to make their mortgage rates look more attractive than they really are. A high initial fee means they can cut the headline interest rate without affecting their profit,” he says.
 
Ray Boulger, of independent mortgage and remortgage adviser John Charcol, adds: “There’s an element of taking advantage of borrowers’ naivety — lenders are disguising the real cost of their deals.”
 
Most mortgages have arrangement fees, but their size varies widely and can be as high as £2,800, according to researchers Moneyfacts. The average is more than £900 — three times the level of a decade ago. And although in many cases, the fee can be added to the loan, this means paying interest on it.
 
Where a lender charges a property valuation fee, this can also be a significant cost, ranging up to more than £1,000 for high-value homes.

Lowest rates Vs cheapest deals
Lender   Mortgage rate Set-up fees Total annual cost
Post Office   1.15 per cent fixed for two years £2,495 £12,670
Chelsea Building Society  1.59 per cent fixed for two years   £0 £12,130
HSBC 2.19 per cent fixed for five years  £1,810 £12,170
Saffron Building Society    1.49 per cent two-year discounted variable £685 (+ cashback of £800) £11,930
HSBC   2.19 per cent fixed for five years £810 £13,140
Based on a £250,000 remortgage on a £500,000 property. Set-up fees include arrangement/booking and valuation fees.
Total annual cost comprises fees, averaged over length of fixed/discount term, plus mortgage payments.
Source: MoneySavingExpert.com, November 13, 2015

Fees have a greater impact on the cost of smaller and shorter-term loans. And they can add up for borrowers who routinely switch when deals end.
 
“Borrowers choosing a two-year fixed rate will have to remortgage again relatively soon, which could see them paying out yet another hefty fee,” says Moneyfacts’ Charlotte Nelson.

However, Boulger warns that borrowers who are put off a low-rate offer just because of its high fees could also end up worse off.
 
With larger or longer-term loans, the size of fees can be relatively unimportant, he says.  
 
Among five-year fixes, HSBC offers a cut-price rate of 2.19 per cent which, even with a booking fee of £499, plus hundreds of pounds of other set-up costs, still works out cheaper than rivals with no fees, according to MoneySavingExpert.com.
 
The site has a free “mortgage best buys” tool, which compares total loan costs, including arrangement and other set-up fees. It includes deals available through mortgage brokers, as well as those only available direct from lenders.

  
A good mortgage broker will also be able to find the right deal based on your circumstances. Brokers will often have details about lenders’ criteria, which can help with applications — and the process should be quicker.

However, it’s not just fees charged at the outset of a mortgage that borrowers should consider. David Hollingworth, of broker London & Country Mortgages, says most fixed-rate mortgages have early repayment charges during the fixed term.
 
These are generally a percentage of the loan and can amount to thousands of pounds, making it important to think about how long you should tie yourself in for.

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