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12 Jun 2022

Mortgage rates vs fees: could the 'cheapest' deals end up being more expensive?

Lenders seek to entice borrowers with fee-free deals as rates rise

The number of fee-free mortgages is on the rise, as lenders battle for business at a time when rates are soaring.

The cheapest mortgage rates have more than doubled since dropping to historic lows last Autumn, with four rises in the Bank of England base rate taking their toll.

With the mortgage rate battle well and truly over, banks are increasingly looking to offer other incentives to entice borrowers.

Here, we explain how mortgage fees work, and offer advice on whether the 'cheapest' deals are really all they seem.

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Lenders offer fee-free deals amid rate rises

New research by Moneyfacts has found that 40% of mortgages are now available without an upfront fee, up from 35% a year ago.

Upfront fees (often called arrangement fees, reservation fees or completion fees) can be one of the biggest costs associated with buying a home.

This month, the average mortgage fee stands at £1,057, down £18 year-on-year. This remains well below the record high of £1,106 recorded in 2012.

The relationship between rates and fees

When mortgage rates are very low, lenders tend to hike their fees in an attempt to recoup the cash elsewhere.

A prime example was last Autumn, when average mortgage rates hit historic lows. More than 100 sub-1% deals were available, and at one stage the cheapest two-year fixed-rate deal was priced at just 0.79% (it is now well above 2%).

The battle to offer the cheapest deal saw headline rates drop, but fees rose considerably. In September 2021, mortgage fees averaged £1,090, £33 more than the figure recorded this month.

Indeed, deals with the lowest rates often came with fees as high as £1,499 or £1,999, well in excess of the figures commonly seen previously. 

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Are fee-free deals more expensive?

Our analysis of data from Moneyfacts shows that the cheapest fee-free deals tend to be around 0.1-0.2% more expensive than market-leading rates. Once you've factored in the full cost of the deal, however, you might find that a 'more expensive' rate is actually cheaper over the fixed term.

Let's take a look at two-year fixes at 60% loan-to-value. Assuming you're borrowing £200,000, you can get a mortgage from Monmouthshire Building Society with a rate of 2.39% and fee of £1,149, or one with Cambridge Building Society at a higher rate of 2.49% but with no fee.

Initial rateFeeMonthly paymentTotal paid over two years
2.39%£1,149£886£22,788
2.49%None£896£21,955


As you can see, the monthly payment is around £10 more on the deal with the higher interest rate, but you'll actually pay around £800 less over the two-year initial term.

This won't always be the case, however. If the market-leading deal has a much lower fee than the above (say £499) and the rate gap is considerably higher, you may be better off taking the deal with the fee - it all depends on the specifics of the individual mortgages. 

Should I add the fee on to my mortgage?

If you take out a mortgage that carries a fee, you can either pay it up-front or add it on to your mortgage.

Adding the fee on to your mortgage can enable you to get that cheaper deal without parting with any cash upfront, but it'll cost you much more in the long run.

By adding the fee onto your mortgage, you'll then need to pay interest on it as part of your debt, which could leave you hundreds or even thousands of pounds out of pocket. 

Are other mortgage incentives worthwhile?

Fee-free deals aren't the only incentives offered by lenders. The chart below shows some of the most common incentives currently available. 

Free valuation fees are available on nearly three quarters of mortgages. When you apply for a mortgage, the lender will conduct its own valuation to ensure the property is worth the approximate amount you're planning to pay for it. These valuations can cost a couple of hundred pounds.

Free legal fees are available on around half of mortgages. These are most commonly available on simple remortgage deals, where the legal elements of processing the loan are much more straightforward than if you were buying or selling a property.

Finally, some lenders offer cashback incentives. Cashback amounts tend to be fairly low (around £500) and are paid after the mortgage has been granted. These incentives are more common on low-deposit deals for first-time buyers

Advice on finding the right mortgage deal

With so many options available, choosing the right deal can be difficult. If you're not sure how best to proceed, we recommend taking advice from a whole-of-market mortgage broker, who will be able to find a suitable loan for your personal circumstances. 

If you're comparing deals yourself, you should always keep an eye on the full cost, and not just the initial rate. As we've explained, lenders can mask a more expensive deal by offering a cheap rate but saddling the product with a high fee. In addition, make sure you look out for high early repayment charges on longer-term fixes (such as five years or longer).

Take your time and shop around before settling. Some borrowers prefer to take out a loan with a bank they already have a current account with, but this can be a costly mistake if it doesn't offer competitive rates.

Finally, think about customer service as well as cost. You'll need to ensure you're choosing a lender that combines good deals with excellent service, which can be invaluable if something goes wrong. Check out our mortgage lender reviews to find out which providers topped the table.