Bargains galore as offers flood mortgage market

Mortgage deals are looking attractive following a quiet period at the end of last year. But advisers are warning borrowers to watch out for hefty fees, which may make the deals less competitive.

Borrowers who switch out of an expensive variable rate mortgage, typically 6.75 per cent, will almost always be quids in by picking up one of the bargain fixed-rate or discounted offers flooding the market, so long as they are not tied in to their lender's loan by a hefty early redemption penalty.

Simon Tyler of London broker Chase de Vere Mortgage Management says: 'The expected price war has started in earnest and both fixed and discounted deals have been cut by many lenders. This time last year the base rate was 0.75 percentage points lower at 4 per cent, yet fixed-rate mortgages were priced at about the same level as they are today, which shows what good value they are relative to the base rate and how hungry lenders are for business.'

Ray Boulger of London broker Charcol says discounted variable and tracker rates are unlikely to get any better than they are now in terms of the margin between the interest rate and base rates, but he predicts fixed rates will get even cheaper. He says: 'If you are thinking about a tracker or a discounted variable rate, there is no point waiting.'

He recommends that borrowers' first port of call for their shopping spree is their current lender. 'See what they can offer you to retain your business. Then you can shop around and see how it compares. Even if it is a bit more expensive, it might be a good idea to take your lender's deal. There is less paperwork and there will be no legal costs or valuation fee, so long as you aren't increasing the value of your mortgage.'

There may be a switching fee, however. For example, Alliance and Leicester typically charges £250 for switching plus any arrangement fee (unless it is a fee-free deal), which may be up to £395 for A&L. It does offer one switcher's special product without this fee. If you end up switching to another lender, there may be an exit fee, which may be as high as £295 for A&L. Some lenders, such as Nationwide, do not charge an exit fee.

Lenders' fees - which have prefixes ranging from 'arrangement', 'completion', and 'administration' to 'exit' - have all been rising. Some apply more than one of these to a single deal. Tyler says: 'This enables the lender to offer a cheaper rate but the costs can be prohibitive and borrowers are better off going for a slightly more expensive rate, but with lower fees.'

Chase de Vere points to a deal from A&L, available on the internet, that offers a discounted rate of 2.05 per cent for two years, meaning a borrower currently pays 4.79 per cent. It has no legal or valuation fees and an arrangement fee of £395.

Compare that with a deal from Lambeth Building Society offering a discounted loan at 4.49 per cent. At first sight it seems more attractive and it equates to a saving of £26 a month on a £150,000 mortgage. Yet the Lambeth deal has an arrangement fee of £345 as well as legal and valuation fees, so the two deals end up costing almost the same over the two years. In this case it means those borrowing more than £150,000 should probably go to Lambeth, while those borrowing less should go to A&L because its fees would amount to a smaller percentage of the loan.

On fixed rates, Chelsea Building Society has an attractive two-year rate at 4.49 per cent. Watch out though, as there is both an arrangement fee of £395 and an administration fee of £245 - a total of £640.

Yorkshire Building Society's two-year fix at the slightly higher 4.59 per cent costs an extra £8.70 a month in repayments, but you save £245 on fees.

When deciding between fee-free deals or to meet those extra costs, Boulger says borrowers should consider the impact on the overall loan: 'You will almost certainly do better with a fees-free deal if the loan is under £100,000.'

If you use a broker, you may face extra costs in terms of their fee - so there will be more sums to consider.