Devil is in the detail with fee free mortgages

Published on Sunday 27 May 2007 00:44

ABBEY has stormed into the mortgage market with a ground-breaking three-year fixed deal which will pay all your upfront costs when you are buying, selling or remortgaging your home.

Many mortgage lenders will pay your legal and survey fees if you are remortgaging with them, including Halifax, Skipton and the Dunfermline. Royal Bank of Scotland and Yorkshire Building Society will also meet your moving costs when you buy a home.

But the Abbey is offering the first deal of its kind that will pay the legal costs associated with selling your previous home and buying your new one, which will be worth around 2,000 per buyer.

Although borrowers always welcome help towards the cost of moving, brokers warn that customers must read the small print carefully and do their own sums, as these new freebies have made it more difficult than ever to compare mortgage costs.

Edinburgh broker John Postlethwaite, of Punter Southall Financial Management, advises borrowers to sit down and work out the entire cost in pounds and pence as the only failsafe way of comparing loans. He explained: "Most people will buy with a fixed-term incentive, either a fixed or discounted rate. So you should add up all the repayments over that fixed term, then add in any fees and take away any cashbacks or other help such as free legals or surveys.

"The possibilities are endless and this is the only way of being sure you are getting the right deal. There are some very low rates around, but they can carry horrendous fees. Alternatively there are fee-free deals, but these have higher rates. Which is best for you will depend on how large the loan is."

Charcol's Ray Boulger added: "If you can get free legals and survey at no higher a rate, it is a no-brainer. Go for it. But if you have to pay a higher rate, then do the sums carefully."

Moving house or remortgaging is an expensive business when professional fees are added to the transaction. It can cost more than 1,300 in legal fees to buy and sell property, plus the 250 Registers of Scotland charge. A survey can cost more than 400.

These bills can be cut significantly by opting for a fee-free deal. Lenders are able to offer these incentives because they will either have an in-house conveyancer who can do the work or they will use a panel of legal firms who will work at discounted prices. Many will also use an automated surveying procedure, particularly where the loan does not represent a large portion of the value of the property. This can be done for about 30.

However, Boulger warned: "Some lenders will claim that their mortgages are fee-free, but you must make sure they also cover disbursements. If these are not covered, borrowers discover at a late stage that they still have to foot the bill for register fees and the fees attached for making the big Chaps money transmission. Institutions can claw back cash by charging over the odds for them."

Abbey is offering "no upfront costs" on a range of tracker and fixed deals. However, according to Boulger, the three-year package which fixes the rate at 5.49% is the cheapest three- year offer on the market.

He said: "The only one which comes anywhere near is the Portman's 5.19%, but it charges an upfront fee of 1.5%, which has the effect of pushing up the rate to 5.69%. Portman also charges interest annually, where the Abbey loan is on a daily interest basis. On top of all this, the Abbey loan is fee-free."

The package offers to pay for all upfront fees including valuation and booking fees, and has no arrangement loading upfront. However, it will only meet registry fees on property up to 500,000.

Apart from the three-year deal, borrowers can opt for a two-year tracker, currently charging 5.67%, or 4.5% if borrowers are prepared to stay with the society for another 18 months. The two-year fix is currently 5.75%, or 5.34% with a further 18-month tie-in. Alternatively, you can fix the rate for five years at 6.02% or 5.52% with an 18-month tie-in.

There are penalties if you withdraw within the agreed term, and the minimum loan is 75,000. It is not normally recommended to tie yourself to a loan after the fixed or discounted period is over, because you can no longer control the rate.

Royal Bank of Scotland also has a range of fee-saving deals which are available both to movers and remortgagers, but they will not meet your selling costs. It offers a two-year tracker at 5.95% which will charge Bank of England base rate plus 0.7% until June 2009. Alternatively, if you have a 25% deposit, you can fix for two years at 6.29%. With a smaller deposit you pay 6.55%.

If you pay an arrangement fee you can still have your legal and survey fees paid, but the rate falls slightly again. The two-year tracker rate falls to 5.7% with a 499 fee; with a big deposit you can fix at 5.64% for the same fee, or 6.15% with a smaller deposit.

Yorkshire Building Society will pay fees on remortgages and purchases with a few deals, and on remortgages only with others. Your legal and survey costs will be met when buying or switching loans on its 10-year fixed deal charging 5.99%. You can fix for two or three years at 5.84% if you pay a 795 arrangement fee, or 6.29% with no fee.