When a best buy mortgage is the worst value

Many banks and building societies are pushing up the fees attached to their mortgages so they can offer more headline-grabbing rates and propel themselves into the best-buy tables.

One mortgage expert this week told Jobs & Money that many lenders have hiked their arrangement fees in recent months, with the average fee now standing at around £500 - nearly double what it was five years ago.

Northern Rock is on some of the current best-buy lists with a two-year fixed rate mortgage where you pay 4.88% until November 2006. It's a great rate - until one counts up the extraordinary add-on fees. The arrange ment fee is a chunky £695 and there's a valuation fee of at least £360, rising to £400-plus for larger loans. So that's at least £1,055 before you take into account some of the other costs associated with buying a house or moving your mortgage.

If you use a mortgage broker that charges a fee, that will add up to another 1% - which these days could easily mean £1,000.

So, any advance on an arrangement fee of £695? Well, yes. With the help of some mortgage brokers we managed to find a few deals with fees that dwarf even that hefty payment.

A base rate tracker deal funded by Birmingham Midshires (part of the HBOS empire) and available through many mortgage brokers has an arrangement fee of £1,500. But when it comes to the king of the fees, the champion of charges... step forward Bank of Scotland with your £2,500 arrangement fee.

To be fair to Bank of Scotland, the mortgage in question isn't exactly your typical loan. It's a tracker deal for people borrowing very large sums (between £500,000 and £5m) where you pay Bank of England base rate plus 0.55% or 0.65% for the term of the mortgage. It's flexible and there are no early redemption penalties. But £2,500 is still a huge amount to charge as an arrangement fee.

So what's the advice for borrowers? Are there some cases where it is actually worth shelling out on these high fees or should people look for deals with lower or no fees but slightly higher rates?

Simon Tyler at broker Chase De Vere Mortgage Management says: "Fees attached to mortgages are rising and this could well be to help lenders keep their headline rates of interest as low as possible.

"The average is now probably around £500 instead of £350 a year or two ago and about £250/£299 four or five years ago - so many arrangement fees have basically doubled in five years."

Banks and building societies are almost certainly using higher fees to boost their profits because they are losing money through more and more people becoming switched on to the benefits of remortgaging every two or three years.

The bigger the fee, the lower the rate the lender can offer. The higher-fee, lower-rate deals can benefit those people taking out big mortgages because the savings they can achieve in terms of lower monthly mortgage payments can make the fees worth paying. But Mr Tyler reckons most people are probably better off looking for deals with lower fees.

Chase De Vere is one of the brokers offering the Birmingham Midshires deal with the £1,500 arrangement fee, though it says it has decided the reduce the fee to £1,200 "to make it a little more palatable".

Brokers say that in general terms, even with a fee that size, the low rate means this deal is worth taking for those borrowing more than £300,000. But for loans of any less, you would be better off taking a slightly more expensive rate with a lower fee.

David Hollingworth at fellow broker London & Country says the Birmingham Midshires deal is a case of "yikes, what a great rate and then yikes, what a big fee," but agrees it's a decent loan for people borrowing more than £300,000 "because the rate is so good".

He adds that in his view, people taking out more modest mortgages - anything below £100,000 - should be looking more at the low/no-fee deals or those offering things like a free valuation. For example, Saffron Walden Herts and Essex building society is offering a two-year discounted rate deal where the current pay rate is 4.64% and loans are available up to 95% of the property's value. It's not the very best rate out there (see mortgage best buys, page 17) but the arrangement fee is "only" £199, they refund the basic valuation fee and there is £300 cashback for new customers.

The Northern Rock 4.88% two-year fix with the £695 arrangement fee is available to people putting down a deposit of at least 25%. If you don't want to pay the fee, the rate rises to 5.25%. And Northern Rock does offer a "help with costs" option. A Rock spokesman says its products are based on a combination of rate and fees, and adds: "It's a trade-off."

Meanwhile, the Bank of Scotland deal with the £2,500 arrangement fee is available through brokers and aimed at high net worth individuals. A spokesman says borrowers are paying for the flexibility the loan offers and the fact that it is a decent rate with no redemption penalties.

It's not all up, up, up on the fees front. This week, Alliance & Leicester announced it is slashing the arrangement fee on some of its deals from £595 to £395. Loans affected include its two-year discounted rate deal with a current pay rate of 4.44% and its two-year fix with a 4.95% rate. Both of these are available for up to 95% of the property's value.

What they will charge you

· Arrangement fee: £695

Several Northern Rock deals including its "best-buy" loan fixed at 4.88% for two years (until November 2006). Also a valuation fee - minimum £360. Maximum 75% loan-to-value (LTV).

· Arrangement fee: £1,200-£1,500

Birmingham Midshires-funded deal available through mortgage brokers where you pay the Bank of England base rate minus 0.76% (in other words, 3.99% now) for two years.

· Arrangement fee: £2,500

Bank of Scotland deal in its "Personal Choice" range available through brokers where you pay the Bank of England base rate plus 0.55% (maximum LTV 70%) or plus 0.65% (maximum LTV 80%) for the life of the loan. Aimed at people borrowing £500,000 to £5m. Offers some flexibility and has no early redemption penalties.