Charges take the shine off cut-price mortgages

Northern Rock and Portman Building Society are offering two-year, fixed-rate deals priced at 3.99 per cent, while the mortgage brokers Savills Private Finance, London & Country and Charcol have all teamed up with Birmingham Midshires to offer cut-price, variable-rate loans.

The brokers' deals track base rates up and down, but with a discount of 0.51 percentage points for two years, so the current interest rate is 3.99 per cent.

The downside to all the deals is that they come with sizeable charges. Northern Rock has an arrangement fee of 1.5 per cent of the value of your mortgage, while Portman is charging 1.25 per cent. The brokers' deals cost £1,499 each.

David Hollingworth, of London & Country, said loans with percentage-based fees were difficult to justify because the charge would rise in line with the mortgage size. "Flat-fee products have more place because, with a large enough mortgage, you can overcome the effect of a fixed fee."

On small loans, the cost of these fees will outweigh the interest savings the deals offer compared with more expensive products with lower charges, particularly as all three rates expire after two years.

"When a mortgage deal has a low rate and high fee, generally speaking, it best suits a borrower with a fairly sizeable loan," said Melanie Bien, associate director of Savills Private Finance. "On these 3.99 per cent deals, the fees mean they best suit those borrowing £175,000 or more."

Borrowers considering the products will need to work out the total cost of the loans over the two-year period, including both interest charges and fees.