The important mortgage detail you should never overlook

Mortgage rates are coming down, but some of the products that appear in the 'best deals' tables might not be quite as cheap as they look.

Around six in 10 fixed-rate mortgages come with upfront fees, which in some cases add thousands of pounds to the overall cost of the deal. 

Read on to learn more about how mortgage fees work, and for advice on comparing mortgages. 

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What are mortgage fees?

Mortgages are often listed in order of their headline interest rates but it's vital that you factor in the fees, too.

These are sometimes listed as 'arrangement', 'booking', 'product' or 'completion' fees – all different names for the same thing.

It's common for upfront fees to be around £1,000, but there are deals currently on the market with fees as high as £2,995.

Most banks charge their fee as a flat sum, but a handful of lenders instead charge a percentage of the amount borrowed, for example 0.5% or 1% – which can add up to a significant amount.

• Find out more: best mortgage rates 2024

Do the cheapest deals have bigger fees?

It's not uncommon for 'cheap' market-leading deals to come with high upfront fees. It all depends on the current property market and the customers the lender is targeting.

Right now, the property market is slow, with fewer people moving. This has resulted in lenders cutting their headline interest rates in an attempt to secure business.

Lower interest rates mean smaller profit margins, and upfront fees are one way that lenders can redress the balance.

Banks that offer fee-free deals may target them at certain customers. For example, cash-strapped first-time buyers may prefer to pay a slightly higher rate in exchange for not paying a fee.

How the cheapest fee-free deals compare

We ran a calculation based on buying a £300,000 house at 75% loan-to-value with a 25-year mortgage to find out whether it's cheaper in the long run to get a fee-free deal.

The lowest rate currently available is 4.12%, and this deal charges an upfront fee of £899. The cheapest fee-free deal has a slightly higher interest rate of 4.28%.

The fee-free deal would cost £20 a month more in repayments, or £480 more over the two-year fixed term.

However, once you factor in the £899 fee, the fee-free deal actually works out £347 cheaper overall. 

• Find out more: our mortgage repayment calculator lets you input fees as well as rates to show how much you'd pay for different deals

Are fee-free deals always better value?

It all depends on the individual scenario. 

For example, if you're borrowing a much larger sum, you might find that the extra interest you'll need to pay on a fee-free deal over two years outweighs an upfront fee.

In some cases, the difference between the overall costs will be negligible, so the decision will come down to your individual preferences.

The good news is that lenders are increasingly offering a greater choice of fee structures, making it easier to directly compare costs.

For example, Yorkshire Building Society, a Which? Recommended Provider, offers three fee options on its mortgage range: on a 90% mortgage, borrowers can choose a rate of 4.99% (£1,495 fee), 5.24% (£495 fee), or 5.34% (no fee).

• Find out more: best mortgage lenders

Should I add the fee to my mortgage?

Most lenders will allow you to add an upfront fee to your mortgage, but think carefully before doing this.

The benefit of adding the fee is that you’ll be able to get the lowest-rate deal without needing to fork out a chunk of cash at an expensive time.

However, the major drawback is that you’ll have to pay interest on the fee alongside the rest of your borrowing, meaning it’ll cost you more in the long run.

With this in mind, it's prudent to either pay the fee up front, or choose a fee-free deal.

Which other incentives should I consider?

Mortgages are more complex than simply fees and rates. You might also see these perks advertised:

• Cashback Lenders often offer cashback of anywhere from £500 to £2,000 as an incentive on their mortgages. Our analysis of Moneyfacts data shows 23% of deals for first-time buyers come with cashback, compared to 16% for existing homeowners. While cashback is nice to have, it's generally not a dealbreaker. And, as it's paid after your mortgage payments have started, you can't put it towards your moving costs.
• Free valuation Before formally offering you a mortgage, the lender will conduct a valuation of the property to confirm it is happy to lend on it. Free valuations are very common, with around 75% of mortgages having this incentive. If you do have to pay for a valuation, the cost will be based on the value of the property and can run to a few hundred pounds.
• Free legals This is when the lender pays for conveyancing. About 45% of mortgages include free or refunded legal fees, and some lenders offer a choice between free legals or cashback. Free legals are far more common when remortgaging, as the legal process of buying a home is much more complicated and it's generally recommended that buyers choose their own conveyancer.

Find out more: the costs of buying a house

Advice on comparing mortgages

1. Consider taking advice from a broker With more than 2,000 mortgages on the market, finding the right one can be tricky and time consuming. A mortgage broker will be able to find the best deal for your circumstances and submit the application on your behalf. 
2. Be aware of early repayment charger Longer-term fixed-rate deals tend to come with early repayment charges, which you'll need to pay if you move house and don't port your mortgage. If you think you might want to move in two or three years, consider taking a shorter-term fix.
3. Choose a lender that offers great customer service Taking out a mortgage is a big commitment, so it's important to know that you can rely on the lender if something goes wrong. We survey thousands of mortgage holders each year on various aspects of customer service, before naming our Which? Recommended Providers. See which lenders made the cut in our guide to the best mortgage lenders.

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