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Cheap mortgage rates vs fee-free deals: which are best for first-time buyers?

Which? explains how to find the cheapest mortgage

As a first-time buyer on the hunt for a cheap mortgage, it’s natural to focus on seeking the lowest initial rate – but a fee-free deal might save you much more in the long run.

Which? analysis of Moneyfacts data shows 40% of first-time buyer mortgages now come without any arrangement fees, up by 25% in the same period last year.

However, while the number of first-time buyer mortgages available with no fee is on the rise, 61% still come with a fee to factor in, and this can make it hard to work out which is the best deal.

  Number of deals available to first-time buyers Number of deals that come with a fee Number of deals that are fee-free
March 2018 3,099 1,987 1,112
March 2019 3,616 2,222 1,394

Source: Moneyfacts

Here we explain how to find the best mortgage deal, and reveal the cheapest fee-free mortgages for first-time buyers.

  • Need help sifting through the thousands of deals available to first-time buyers? Call Which? Mortgage Advisers on 0800 197 8461.

Can you spot the best mortgage deal?

Currently, Halifax offers the lowest-rate two-year fixed-rate mortgage for first-time buyers with a 5% deposit.

The 95% loan-to-value (LTV) mortgage deal comes with an initial interest rate of 2.67% but has an eye-watering £1,495 fee. The annual percentage rate of charge (APRC) for this deal is 4.2% (more on APRCs later).

Alternatively, Barclays is offering a two-year fixed-rate 95% mortgage with a higher initial rate of 2.88% but no fees (APRC 4.1%).

So, which is the better deal: 2.67% or 2.88%?

At first glance, it looks pretty black and white. The lower-rate Halifax deal will give you the smaller monthly repayments. However, as you’ll see in the next section, the size of the fee means it’s actually more expensive in total than the Barclays deal.


Rates can distort the true cost of a mortgage

Here’s how the two-year fixed-rate 95% LTV mortgage from Halifax, which has the lowest interest rate on the market for this type of product, compares to the cheapest fee-free alternative from Barclays. We’ve based our calculations on a £250,000 mortgage with a 25-year term, with fees paid up front.

Halifax (initial rate 2.67%) Barclays (initial rate 2.88%) Difference
Monthly repayments £1,143.07 £1,169.98 Halifax deal is £26.91 cheaper
Total cost over two-year deal period £28,928.68 (including £1,495 fee) £28,079.52 Barclays deal is £849.16 cheaper

 

As you can see, the cheapest deal in the two-year period is Barclays’ fee-free mortgage which, despite having slightly higher monthly repayments, ends up being more than £800 cheaper than the market-leading rate from Halifax in the course of the first two years.

Generally, mortgages that offer a low rate but high fees are more likely to make sense for those borrowing a large amount, as the fee then represents a smaller proportion of overall borrowing.

With these two deals, the Halifax option only becomes cheaper than Barclays when a person borrows £579,000 – a lot more than most first-time buyers would be able to get and beyond the maximum borrowing limit of the product.

You can use our mortgage repayment calculator to compare the costs of one mortgage versus another.

Best fee-free first-time buyer mortgages

We’ve analysed Moneyfacts data to find the best fee-free mortgages available to first-time buyers with small deposits.

Here are the best two-year fixed-rate 95% LTV mortgage deals that come with no fees.

Lender Initial rate Revert rate (SVR) APRC Lending area
Progressive Building Society 2.79% 5% 4.74% Northern Ireland
Barclays Mortgages 2.88% 4.24% 4.1% All UK
Skipton Building Society 2.89% 4.99% 4.7% England, Scotland, Wales

Source: Moneyfacts, 5 March 2019.

If you are looking to fix for longer here are the best fee-free five-year fixed-rate 95% LTV mortgage deals.

Lender Initial rate Revert rate (SVR) APRC Lending area
Monmouthshire Building Society 3.19% 5.24% 4.6% England, Wales
Digital Mortgages by Atom Bank 3.24% 4% 3.76% All UK
Post Office for Intermediaries 3.28% 4.74% 4.2% England, Scotland, Wales

Source: Moneyfacts, 5 March 2019.

Finding the best mortgage deal

When shopping around for a mortgage it’s important to look beyond the headline interest rate and take into account all the fees you’d have to pay.

You’ll also need to weigh up the value of any extra benefits, such as cashback or free valuations.

If you can, it’s better to pay any fees up front rather than adding them to your mortgage in order to avoid paying interest on them for the duration of your term.

What’s the APRC, and does it matter?

Most mortgages come with an introductory interest rate which lasts for a set period, often two or five years.

Deals will also be advertised with an APRC, which stands for annual percentage rate of charge, and is a way of conveying the overall cost of the mortgage.

How important this is largely depends on how likely you are to switch deals (known as remortgaging) at the end of the introductory period.

This is because the APRC is the average rate you would pay over the entire term of the mortgage, based on both the introductory interest rate and the ‘revert’ rate – the lender’s (usually much higher) standard variable rate, which you’ll usually be moved onto at the end of the introductory period if you don’t remortgage.

While an APRC can be useful as it also takes fees into account, if you intend to remortgage at the end of the introductory period (which is almost always the best thing to do), it becomes less relevant.

Comparing mortgages can be a bit of a minefield so it’s well worth taking advice from an independent mortgage broker before applying for a deal.

Get personal advice on the best deal for you

There are hundreds of first-time buyer mortgages on the market that come with no fees, cashback, free valuation and other perks.

For help comparing deals and applying for a mortgage, call Which? Mortgage Advisers on 0800 197 8461 or fill in the form below for a free callback. The team aren’t financially incentivised to recommend one product over another, so you can trust that they’ll only ever suggest the best option for you.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.

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