Fee-free home loans may not be the cheapest

For a cash-strapped first-time buyer in particular, an arrangement fee can feel like insult has been added to the injury already sustained by their wallet.

Last week, Barclays and Woolwich joined the growing number of high-street lenders now offering fixed-rate home loans with no arrangement fee, with the launch of a two-year deal at 4.89 per cent, and a five-year deal at 4.99 per cent.

These offers follow hot on the heels of a two-year fix at 4.79 per cent from Alliance & Leicester, and a five-year fix at 5.19 per cent from Cheltenham & Gloucester - launched earlier this month. The Halifax, Bank of Scotland and Nationwide building society have also launched fee-free deals.

But Melanie Bien, at broker Savills Private Finance, warns that while these offers sound great in theory, customers need to watch out for the rate of interest charged.

"Lenders have to make their money somewhere, and there are better deals out there than those offered by Barclays and Woolwich - even if you have to pay a fee."

BM Solutions, for example, recently launched a two-year fixed-rate deal: it has a high arrangement fee, £1,449, but an interest rate of just 3.89 per cent.

Even if you take out a mortgage of just £100,000, says Ms Bien, a loan from BM Solutions will work out cheaper than the new Barclays product. A two-year fixed-rate deal for this amount - interest-only, over 25 years - will cost you £83.33 a month less with BM Solutions.

"After 18 months, you have covered the £1,449 fee," adds Ms Bien. "Over the two years you save £550, and the savings are even greater on a larger mortgage."

Simon Tyler from Chase de Vere Mortgage Management, a broker, says the Barclays deal is pretty good for people looking to borrow a high percentage of the property value and needing to keep upfront costs to a minimum.

But those with bigger deposits, he adds, could consider a two-year fix from Portman building society at 4.15 per cent, while remortgagers should look to the Halifax, which has a two-year fixed rate of 4.29 per cent.

Consumers should be aware of the total cost of the mortgage, says Ms Bien, taking both rates and fees into account.