Don’t fall for “fee-free” mortgages

A growing number of mortgage lenders are scrapping arrangement fees to lure in borrowers. But do the sums first, says Emma Lunn.


She can now borrow 5.5 times her income to buy an overpriced house
(Image credit: Klaus Vedfelt)

A growing number of mortgage lenders are scrapping arrangement fees to lure in borrowers. Around 40% of available mortgage deals in July 2018 came with no fees, according to data provider Moneyfacts. This is up from 36% in July 2017, and 33% in July 2016. However, if you're tempted by a fee-free mortgage, it's important to sit down to work out the numbers, as the lack of upfront costs could actually mask a higher interest rate. To compare deals accurately, you need to look at the total costs over the fixed term of the mortgage so two years if you're opting for a two-year fixed rate, or five years for a five-year fixed rate. Some borrowers may find they are better off paying a fee for a lower rate.

For example, Sainsbury's Bank offers a two-year fixed rate of 1.92% with no fee, available up to 60% loan-to-value. A £150,000 mortgage repayable over 25 years would cost £630 a month that's £15,120 over two years. Nationwide has a two-year fix at 1.54% with a £999 fee and £500 cashback. The total two-year cost comes to £14,971, £149 less than the Sainsbury's Bank deal.

Tempting deals for professionals

Clydesdale Bank has launched a new scheme likely to bolster demand for overpriced housing. Newly qualified workers employed in certain professions can now apply for a new range of mortgages. The "professional mortgage" range is targeted at people who have qualified in the past five years and are now working as an accountant, architect, barrister, chartered surveyor, dentist, engineer, doctor, nurse, optometrist, pharmacist, pilot, police officer, solicitor, teacher or vet. These mortgages are available up to 95% loan-to-value for loans between £80,000 and £500,000, and come without arrangement fees or valuation costs.

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There are two-, three- and five-year fixed rates on offer. So someone borrowing at 95% loan-to-value (LTV) could fix their mortgage rate for two years at 3.59%, three years at 3.69%, or five years at 4.09%. Eligible applicants can borrow up to 5.5 times their income on the deals. This is in stark contrast to most mainstream mortgage products, which cap borrowing at four times the borrower's income. Other lenders offering specially tailored mortgages for qualified professionals include Saffron Building Society and Scottish Widows.

Buy-to-let clampdown is working

The latest survey from the Royal Institution of Chartered Surveyors (Rics) suggests that the government's efforts to discourage buy-to-let investment have worked. The report showed that rents are set to rise by just under 2% over the next 12 months, while the supply of fresh rental stock remains "increasingly constrained". The "most striking" feature of the survey is that the number of new landlord instructions to Rics' agents (people hiring a surveyor to look at their new property) fell in July for the eighth consecutive quarter. Significantly, this drop is evident in virtually all parts of the country.

This pattern is "symptomatic of the shift in the mood music" in the buy-to-let market, following a series of tweaks to the tax system in the past two years, notably a 3% stamp-duty surcharge for private landlords and the removal of tax relief on mortgage interest for higher-rate taxpayers. The drop in supply will lead to higher rents if there isn't a significant jump in social housing or the "build to rent" programme, according to Rics. For now, there's little sign that either can compensate for the shortfall. By 2023, rents could have increased by around 15%.

Emma Lunn

Emma Lunn is a multi-award-winning journalist who specialises in personal finance and consumer issues. With more than 18 years’ experience in personal finance, Emma has covered topics including mortgages, first-time buyers, leasehold, banking, debt, budgeting, broadband, energy, pensions and investments. Emma’s one of the most prolific freelance personal finance journalists with a back catalogue of work in newspapers such as The Guardian, The Independent, The Daily Telegraph, the Mail on Sunday and the Mirror. As a freelancer she has also completed various in-house contracts at The Guardian, The Independent, Mortgage Solutions, Orange and Moneywise. 

She also writes regularly for specialist magazines and websites such as Property Hub, Mortgage Strategy and She’s particularly proud of her work writing about the leasehold sector and a Guardian front-page story about a dodgy landlord. She has a real passion for helping people learn about money – especially when many people are struggling to get by in today’s challenging economic climate – and prides herself on simplifying complex subjects.