Beware the hidden costs of new mortgage deals

A "price war" has broken out in the mortgage market, reports The Guardian's Mark King. Britain's mortgage lenders are competing to launch "the lowest five-year fixed-rate loans ever seen in the UK". But borrowers shouldn't get too excited these deals are being targeted at a carefully selected group of borrowers.

So what's the deal? On Tuesday the Nationwide building society got the headline writers moving with a home loan offering a 2.89% rate, fixed for four years. However, the devil, as always, is in the detail. First, there's a £999 arrangement fee. That's not the highest on the market, but it's pretty steep.

If you're a first-time buyer, this fee is cut to £499. But before aspiring homeowners start jumping for joy, they should realise that to qualify you need a minimum 40% deposit (as well as a Nationwide FlexAccount current account). With the average British house price at around £164,000, that's a pretty big ask (about £66,000).

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Rival deals come with similar caveats. For example, RBS/NatWest has released a five-year fixed-rate loan at 2.95%, undercutting 2.99% deals launched a few weeks ago by Santander and HSBC. Once again, you'll need a 40% deposit, or existing equity (the market value of your house, less any existing mortgage debt) of at least 40%.

The RBS deal also comes with a hefty £2,495 fee, making it only really viable for those borrowing large amounts (above £100,000), says Ray Boulger of mortgage broker John Charcol in the Financial Times.

On the plus side, a fee of this size on a five-year deal is roughly the annual equivalent of a typical £999 fee on a two-year deal. Nonetheless, it's a big chunk of cash to find. Given the equity/deposit requirement of 40%, this all rather limits the appeal of this deal to a pretty privileged pool of borrowers.

The upshot? Having saddled borrowers with huge amounts of debt during the boom years by being far too relaxed on lending criteria, lenders have now swung entirely the other way and seem only willing to lend on competitive terms to the most credit-worthy borrowers. It may leave first-time buyers feeling rather frustrated.

Although banks such as Lloyds and HSBC keep promising to boost mortgage availability, don't hold your breath this year. The one grain of comfort? With national house prices falling, you should be able to get the house you want cheaper when the mortgage market finally eases up.