Driving force behind growth in fee-free deals

In May, Yorkshire Building Society, the UK’s second largest building society, commissioned research into the incentives and obstacles facing home buyers.

The study among 2,000 people who do not prefer to rent, showed that paying up-front fees (75 per cent) was among the biggest barriers faced among prospective home buyers.

Research from Moneyfacts back in June reveals the number of fee-free mortgages has quadrupled in the last five years.

The volume of fee-free deals has increased from 220 deals in 2010 to a staggering 902 today.

With a quarter of the market now offering fee-free deals, Charlotte Nelson, finance expert at Moneyfacts.co.uk, says it is clear that lenders are trying to compete in other ways besides the traditional headline rate.

By offering multiple product combinations, Ms Nelson says providers are almost allowing their borrowers to customise their mortgage to suit them.

But to put the growth in fee-free deals into context Ray Boulger, senior technical manager of John Charcol, points out the number of deals of all types has expanded rapidly over the last five years.

The reason behind growth in the types of deals lenders offer is because lenders had little money to lend in 2010, he notes.

Mr Boulger says: “At that time many lenders offered a very limited range, with often only one product per rate type, i.e. two-year fixes, five-year fixes.

“Now many lenders offer a choice of rates and fee, i.e. no fee, or a low fee, with a higher rate than they would otherwise pay or a lower rate with a fee.”

In terms of whether the number of these deals will increase in the future, Mr Boulger points out most lenders already offer a free valuation and, so called, free legal fees on remortgages.

But he says as competition increases, including more fee-free options in their product range would be an obvious way to attract certain borrowers.

Mr Boulger said: “A growing recent trend has been to offer a cashback, which is sometimes dressed up for marketing purposes as, for example, paying stamp duty land tax or a year’s council tax.

“Another reason why the annual percentage rate is misleading is that any cashback is ignored but in some cases cashback may be more valuable than not paying any fees.

“In addition having an arrangement fee, which can normally be added to the mortgage above the product’s maximum LTV, plus cashback, is effectively a way of borrowing a little in excess of the stated maximum LTV, which may be helpful for some struggling to find the deposit.

“Soft facts like this need to be considered in some cases in addition to a straightforward mathematical calculation.”