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Are the cheapest mortgage deals too good to be true?

Mortgage fees top £1,000 as banks entice borrowers with low rates

Are the cheapest mortgage deals too good to be true?

The cheapest mortgages now come with up-front fees of as much as £1,500, as lenders battle to offer table-topping rates.

Average mortgage fees have risen to more than £1,000 in recent months, but we’ve found lenders are charging significantly more on their ‘cheapest’ deals.

Here, Which? explains why fees have jumped, and offers advice on how to compare mortgage deals.


Average mortgage fee tops £1,000

Mortgage rates have fallen in recent months, marking good news for home buyers and people looking to remortgage.

Rates of below 1% are now available on two-year fixed-rate deals, and five-year fixes have fallen to the lowest levels on record.

There are signs, however, that lenders are making their money elsewhere, in the form of high up-front fees.

New data from Moneyfacts shows the average mortgage fee has risen by £57 year-on-year, to reach £1,075.

This is slightly down on the £1,081 recorded two months ago, which was the highest average since 2012.

There are also signs that lenders are moving away from fee-free deals – 35% of deals currently on the market are available fee-free, compared to 40% a year ago.

Why are mortgage fees rising?

When people compare mortgages, the first thing they see is the initial rate.

With this in mind, lenders are battling to offer market-leading rates at a time when the property market is booming.

This is especially the case with low loan-to-value (LTV) mortgages. Last month, several banks launched 60% LTV mortgages with rates below 1%, the first time we’ve seen that happen since 2017.

It was once common to see the cheapest deals come with fees of just under £1,000 (usually £995 or £999), but we’re now increasingly seeing chart-topping mortgages with fees of £1,495, £1,499 or even £1,999.

Eleanor Williams of Moneyfacts says: ‘Lenders may be raising fees to gain margins in the aftermath of a fixed-rate war, and this may also potentially be linked to the resurgence of sub-1% mortgages as, whilst eye-catchingly low, these initial rates can also carry the highest fees.

‘Borrowers may need to search a little harder if they are looking to keep mortgage costs to a minimum or secure a fixed-rate mortgage without a fee.’

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Fees on chart-topping deals

We’ve analysed data from Moneyfacts to show how much lenders are charging up-front on table-topping deals.

The chart below shows the average mortgage fee on the top 10 lowest-rate deals at five loan-to-value levels.

As you can see, high up-front fees are more of an issue at lower loan-to-value levels, where lenders are scrambling to offer ever-cheaper rates. At 60% loan-to-value, the cheapest two-year fixes come with fees averaging nearly £1,500.

The lowest fees are on 90% and 95% mortgages, where cash-strapped first-time buyers are more likely to take a higher initial rate in exchange for a lower up-front cost.

When is it cheaper to take a deal with a higher rate?

High fees mean it’s sometimes better to ignore the ‘cheapest’ deal and instead choose one with a slightly more expensive rate.

If you’re looking for a two-year fix at 60% loan-to-value, choosing HSBC’s 1.24% deal rather than Platform’s 0.95% deal will actually save you money over the two-year period.

The monthly payments on HSBC’s deal are £26 more than Platform’s, but the lack of an up-front fee (compared to £1,499 from Platform) means you’ll save £865 over two years.

Lender Initial rate Up-front fee Cost per month Cost over two years
Platform 0.95% £1,499 £749 £19,531
HSBC 1.24% £0 £775 £18,666

Which type of deal should I choose?

When it comes to choosing a mortgage deal, much is down to your own circumstances.

For example, saving £800 by choosing the higher rate above might seem like a no-brainer, but some borrowers may prefer to pay an up-front fee in exchange for the lower monthly payments.

This is particularly the case when it comes to deals with smaller fees, such as £499 or £999. In these instances, there may be little to choose in the overall cost of borrowing.

How to compare mortgages

  1. Consider your circumstances: The first decision you’ll need to make is which mortgage term to choose. Most commonly, people take out two-year or five-year fixed-rate mortgages. Two-year fixes come with cheaper rates and the freedom of not being locked in for a long period. Five-year fixes are slightly more expensive, but protect you against changes to interest rates for a longer period. Most five-year deals come with early repayment charges, which could leave you with a big bill if you move home before the end of the term.
  2. Look at the overall cost: As we discussed earlier, you’ll need to weigh up the balance between rates and fees when comparing mortgages. It’s worth looking at the mortgage’s Annual Percentage Rate of Charge (APRC), which will be listed among the deal’s key information. The APRC is the overall average interest you’d pay if you kept the mortgage for the entire term (e.g. 25 or 30 years). You’ll almost always want to switch to a better rate after two or five years, so this isn’t entirely representative, but it can give you an idea of how the deal compares with competitors.
  3. Check the lender’s reviews: A mortgage is a big financial commitment, so ensure you’re choosing a bank or building society that will provide both a good deal and great customer service. Our mortgage lender reviews assess lenders on a range of criteria, including overall customer service, value for money, flexibility and online services.
  4. Consider using a mortgage broker: Mortgages can be complicated, so if you’re struggling to work out which deal to go for, it can be helpful to take advice from a whole-of-market mortgage broker. A broker will be able to look at all of the mortgages on the market to find you a suitable one for your circumstances.
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