A mortgage that comes without a set-up fee, valuation or mortgage legal costs is understandably tempting.
After all, who wants to pay fees which could total anything from £1,000 to £5,000 if they don’t have to?
But fee-free deals may not be all they’re cracked up to be.
Which means you need to keep your wits and your calculator about you, if you don’t want to end up getting fleeced.
Fee-free doesn’t mean cheap
Mortgage lenders exist to make a profit. True, deals like this bring in extra custom, but they’re not content with that.
So they boost their bottom line even further by charging higher interest rates on fee-free deals.
Here’s what we mean
At time of writing, one leading lender was offering a fee-free, five-year fixed-rate loan at 5.89 per cent annual interest.
For someone borrowing £100,000 on a repayment basis over 25 years, the monthly cost would be £637.59 or £38,255 over the five years.
But a rival provider has a five-year fixed-rate loan at 5.49 per cent, which gives a monthly payment of just £613.49 a cost of £36,809 over five years.
Even if you add in this deal’s £399 set-up fee and add another £600 for a valuation and basic solicitor’s costs, you would still be almost £450 better off going for the fee-paying option.
And When They Say Fee-Free
Even with a fee-free deal, you may still face a higher-lending fee, early redemption penalty and an exit fee.
To find out more about these and how to minimise them, read What are all these fees for?
So What’s the Solution?
Don’t dismiss fee-free deals out of hand: you may just stumble on a genuinely good one.
But do scrutinise them carefully and compare them to a range of fee-charging alternatives before making up your mind.
For help comparing the costs, visit How much will my mortgage cost me every month? in our mortgage calculators section.
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