Fee-free mortgages for small deposits

MortgagesGood news for borrowers with only small deposits and Clydesdale and Yorkshire Banks waive fees.

When it comes to buying a house, mortgage fees are a prime example of an unexpected cost that can throw your whole budget out of sync.
After saving for a deposit, accounting for Stamp Duty and getting to grips with all your legal costs, the last thing you want to hear about is an arrangement fee on your hefty loan, especially if you're a first-time buyer already stretched to breaking point.

Arrangement or product fees can be painfully high and range from £400 to an eye-watering £2,000.
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So if your finances don't have that sort of give, two new offers from Clydesdale and Yorkshire Banks could be of interest.

Clydesdale and Yorkshire Banks' fee-free offer
Last week Clydesdale and Yorkshire Banks unveiled two new fee-free mortgages, meaning first-time buyers can save a nice £599 when taking out one of their three-year fixed rate deals.

Even better the rates have been reduced and are available on mortgages which only require a small deposit.

So if you only have a 5% deposit, you can take advantage of a three-year fixed rate of 5.99% (reduced from 6.19%) with no fee to worry about.

Alternatively, for a slightly bigger 10% deposit, there is a three-year fixed on a lower rate of 4.99% (reduced from 5.49%) again without the fee.

Fee-free pitfalls
The lure of a fee-free deal is easy to understand - everyone wants to reduce the cost of buying a property wherever they can.

However, fee-free deals generally have a higher rate of interest compared to those with arrangement costs. That means that in the long term your mortgage costs you more, all for the sake of skipping a fee at the outset.

This premium is apparent when you look at two deals available from First Direct. This lender has a two-year fixed rate offer of 4.19% at 90% loan-to-value with arrangement fees of £999. But if you want to avoid that fee, your rate is hiked to 4.89% - an increase of 0.7%!

This means if you took out a loan of £150,000 over 25 years with the First Direct fee-charging deal, you could expect monthly mortgage payments of £807.58.

But on the comparable fee-free option, at 4.89% your repayments rocket to £867.30 a month, almost £60 a month more. Over 25 years, that's an extra £18,000!

The true cost of a mortgage
Most lenders will give you the option of paying the fee upfront or to add it to the amount borrowed.

The latter sounds harmless considering the sheer size of what you are borrowing already. What's a few extra hundred pounds when you are already borrowing hundreds of thousands of pounds?

But attaching this cost onto the total amount you borrow means you will be paying interest on the fee for the whole term of the loan, adding to the cost both monthly and overall.

So, if we take the First Direct example again, with its fee of £999, interest rate of 4.19% and term of 25 years. You would end up paying back over £1,000 in interest just on the fee.

Mortgage advice
Fee or no fee you should consider the short term and long term of what you can afford by doing a few quick calculations yourself.

You can also talk to our mortgage brokers, free of charge, for some helpful advice if you are stuck wondering which deal is best for you.

Top 20 fee-free mortgages

Lender

Type

LTV

Rate

HSBC

Two-year fixed

70%

3.59%

Halifax

Two-year fixed

60%

3.79%

Lloyds TSB

Two-year fixed

60%

3.94%

Lloyds TSB

Two-year fixed

75%

4.39%

Britannia

Two-year fixed

85%

4.09%

First Direct*

Two-year fixed

90%

4.89%

Yorkshire Building Society

Two-year fixed

90%

5.09%

Yorkshire Building Society

Three-year fixed

85%

4.59%

The Cooperative Bank

Three-year fixed

90%

4.69%

Clydesdale and Yorkshire Banks

Three-year fixed

90%

4.99%

Clydesdale and Yorkshire Banks

Three-year fixed

95%

5.99%

HSBC

Five-year fixed

70%

4.29%

Yorkshire Building Society

Five-year fixed

85%

4.79%

First Direct*

Five-year fixed

90%

4.99%

Britannia*

Lifetime tracker

60%

2.59% (base rate + 2.09%)

First Direct*

Lifetime tracker

65%

3.19% (base rate + 2.69%)

HSBC

Lifetime Tracker

70%

3.29% (base rate + 2.79%)

First Direct*

Lifetime tracker

75%

3.49% (base rate + 2.99%)

Britannia*

Lifetime tracker

85%

3.69% (base rate + 3.19%)

Britannia*

Lifetime tracker

90%

4.59% (base rate + 4.09%)

*Product only available to current account holders

Table correct as of 21/05/2012
This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker, before acting on anything contained in this article.

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future.

Make sure you take all this information into account when comparing different deals.

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

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