The interest rate is beautiful but you'll snag on the charges

Look beneath the surface of 'cheap' deals, says Melanie Bien

There's more to selecting the best mortgage than getting the lowest rate. Whether you are a first-time buyer or remortgaging to another loan, you should also pay attention to the arrangement fees, particularly as lenders are increasing these to offset the cost of offering market-leading rates.

Some of the cheapest mortgages are now saddled with eye- watering charges, putting a sting in the tail of an attractive deal.

An arrangement fee is usually charged when you take out a mortgage, and this varies considerably between lenders. What most have in common, though, is that they've been edging upwards over the past year. A £395 fee on a fixed-rate deal is quite common now, whereas a year ago it would probably have been £295. Even Nationwide, which used to charge £149, now asks for £249.

According to broker Mortgage Talk's latest weekly "best buy" table, Northern Rock's two-year deal at 4.69 per cent is the best short-term fixed-rate mortgage currently available. But, to get this, you will have to pay a whopping £595 arrangement fee, plus a valuation fee of £385.

The valuation fee is the charge the lender makes for surveying your prospective home to ensure it is worth as much as you want to borrow to buy it.

Northern Rock is offering customers £1,000 cashback, which is paid on completion but would be swallowed up by those fees. And bear in mind that if you remortgage within three years of taking out this deal (which you should do, once the two-year offer period ends), you have to pay this £1,000 back. One way of avoiding this is to switch to another Northern Rock mortgage after the deal ends - though you will incur another £595 arrangement fee for doing so.

Northern Rock is not alone. Top of Mortgage Talk's long- term fixed-rate table is Alliance & Leicester's five-year deal at 4.99 per cent until 30 June 2009. This has a £280 valuation fee, which is refundable, but its arrangement fee is also £595.

Andy Frankish, technical director at Mortgage Talk, says you should look at the overall cost of the deal. "It depends on your situation. The longer the loan and the higher its value, the more important the rate is rather than the fees," he says. "The higher upfront charges are less attractive to first-time buyers who don't have a lot of spare cash, but some banks and building societies will now refund the arrangement or valuation fees."

Ray Boulger, technical manager at mortgage broker Charcol, says: "It all depends on the size of your mortgage. If you have a loan of less than £400,000, you want a low arrangement fee and a higher interest rate. But if you have a bigger mortgage, you should pay a higher fee if it means you get a lower rate."

He says that looking at the annual percentage rate (APR) to try to compare deals is a waste of time. "The APR is completely irrelevant and even the Financial Services Authority [the City regulator] recognises that it is misleading, unless you are comparing two lifetime deals. Because most people remortgage after two, three or five years, when their offer period comes to an end, the payable rate over the term of the mortgage isn't a factor."

When choosing the best deal, Mr Boulger suggests you look at the total cost of the credit over the offer period, including all the fees. Only then can you compare it with deals offered by other mortgage lenders.

Charcol has a free calculator on its website (www.charcol-online.co.uk) that lets you work out the cost of a mortgage once the rate and fees have been taken into account.

Some lenders add the arrangement fee on to your mortgage, so you don't have to fork out a lump sum upfront. Even though you will pay interest on this, it is not a huge amount, so you needn't worry too much about the additional cost. As you will probably be remortgaging within a few years, it's not as if you are paying it back over the mortgage term, anyway. And if you opt for a lender that allows you to overpay up to 10 per cent of the mortgage balance each year without penalty, this will enable you to clear the loan more quickly.

If you have a choice of paying your fees on arrangement or completion, opt for the latter. That way, if the mortgage or your house purchase falls through, you won't have to pay anything to the lender.