Fees-Free Mortgages

You have likely seen advertisements for fees-free mortgages. These ads carry on about how much money the lender will make on the interest on your mortgage and the fact that this means they do not have to charge you set up fees and valuation fees at the beginning of your mortgage. You are probably tempted to look into this type of mortgage. After all, who wouldn’t want to save thousands of pounds on their new home? But before you take the plunge, you should know that there is a catch to this type of mortgage.

If It Sounds Too Good to Be True. . .

You’ve heard the old adage, “If it sounds to good to be true, it probably is.” This is true for fees-free mortgages as much as any other financial product. There is a catch to fees-free mortgages.

Homebuyers are attracted to fees-free mortgages because of the potential savings. The set-up fee alone can be as high as ?4,000 on a mortgage. However, the lender is not in business to give you nice gifts, but rather to make money. As a result, these savings will be made up somewhere down the proverbial road.

Most of the time a fees-free mortgage will carry a slightly higher interest rate than a traditional counterpart. For instance, if you can land a fees-free mortgage with a five-year fixed rate of 5.89%, you will pay ?637.59 per month. Compare this to a traditional mortgage with a rate of 5.49%. The monthly cost of this mortgage would be ?613.49. At the end of the five-year fixed rate term, you will have paid nearly ?1,500more for the fees-free mortgage, simply because of the higher interest rate.

Of course, this does not factor in the set-up fees on the second option. As long as the set-up fees and valuation fees are less than ?1,000, you will still save at least ?400 on the entire mortgage deal after five years.

Also, fees-free doesn’t always mean completely fees-free. Lending fees, early redemption fees, and exit fees are often tied to these types of loans. Often the only fees that are removed are the set-up and valuation fees.

Are All Fees-Free Mortgages Bad?

Fees-free mortgages may carry a higher interest rate, but they are not always a bad deal. Borrowers looking at this type of structure need to be aware of the potential extra costs. However, there are many times when a fees-free mortgage is the most affordable option. You just need to know how to evaluate the extended cost of the mortgage, rather than simply looking at the instant savings.