Is fee-free worth the premium?

Things are all going a bit fee-free lately.

Several lenders are taking the initiative to cut down or remove product fees as cash-strapped borrowers plan their next moves in the mortgage market.  And some of these deals are starting to look a bit more worthwhile compared to their fee-paying alternatives.

Take Alliance & Leicester's four year fixed rate mortgage for example. If you opt for the 'standard' version, you get 5.09% but pay £995 up front.  However, forego the fee and you get 5.59% fixed.  Now, that's only a 0.5% premium which isn't catastrophically higher.  The difference on a £100,000 mortgage is around £50 a month.  So it's clear that the fee option is still better value overall; the payoff is within 18 months,  Nevertheless, if you don't have the cash, this is more attractive than many deals with a less modest no-fee interest premium.

Britannia has a similar margin on its fee-free fixed rate mortgages: five years at 5.59%, ten years at 5.69%, both set no more than 0.5% above the rates it offers for applicants paying £999 fees.  Northern Rock's margin on a no-fee mortgage also comes in below 0.5% on most loan-to-value scenarios.

The problem with most of these fee-free deals, though, is that they're not available with low deposits.  So it's clear they are being offered to tempt remortgagers rather than first time purchasers.

Also, why are these options only available on fixed rate mortgages?  This is at a time when tracker mortgages are surging in popularity and fixed rates are pegged a long way over base.  HSBC is one of the few exceptions. A first time buyer with a 25% deposit can get an HSBC fee-free tracker at 3.29% over the Bank of England base rate for the life of the loan.  Tie-ins?  None.  Still, though, if you'd pay £799 in fees, you'd get base rate plus 2.45%.  So that's a less favourable 0.84% premium.  Moral of the story: despite these fairly promising moves, if you want a good overall deal, get a fee!