First Direct has slashed its mortgage fees following pressure from customers, but has also hiked rates by up to 0.2 per cent to compensate.
The lender has typically offered the cheapest rates in the market but to squeeze a bit more profit from deals, product fees have been at the higher end of the scale – tipping £1,450.
Now, after customers complained about the expensive fees, the lender has launched a range of slightly higher rate, lower fee deals as well as a selection of fee-free options.
After customers complained about expensive fees, the lender halved fees and hiked rates
Nick Harrison, of First Direct, said: ‘We always aim to offer outstanding customer value, and customers have told us they’d prefer fee-free or lower upfront fees with their mortgage so we’re acting on this.
‘There’ll be some rate changes to accommodate this, but it will help provide an even more attractive proposition to customers looking to remortgage or purchase their first home.’
In spite of rates rising, the deals are still among the most competitive in the market.
For borrowers with a 25 per cent deposit or equity, a two-year fixed rate comes in at 1.34 per cent with a £725 fee, putting monthly repayments on a £150,000 loan over 25 years at £589.
The five-year fix for this loan-to-value is priced at just 1.89 per cent with a £725 fee making monthly repayments £628.
By comparison, Atom Bank is charging 1.74 per cent to fix for five years with a £900 fee up to 75 per cent loan-to-value, making monthly payments £617 and costing £474 less over the five year period than the First Direct deal.
Co-op Bank also has a five-year fixed rate at 1.74 per cent but its fee is a whopping £1,499, making it £125 more expensive than First Direct over five years, while HSBC’s five-year fix at 1.74 per cent incurs a £999 fee, making it £375 cheaper than its First Direct rival.
First Direct borrowers can also choose not to pay a fee at all, with the five-year fixed rate for those with a 25 per cent deposit or equity now just 1.99 per cent, putting monthly repayments at £635.
Over the full five years, the fee-free option comes in £289 cheaper than the First Direct five-year fix with a lower rate and £725 fee.
What has First Direct done?
This is really just tinkering, but it’s an unusual approach nevertheless.
Over the past 18 months lenders have battled for customers by offering rock bottom rates, often paid for by fees which have climbed higher and higher in recent years.
Now First Direct, part of HSBC, has chosen to slash its fees and inch rates up instead – which could mark the beginning of the end for the rate wars we’ve seen this year.
With several mortgage rates on offer for under 1 per cent, profit margins on mortgage lending are now so low, there’s little room to cut rates.
Cutting fees is simply a different way to skin the cat.
It can be a fine balance figuring out which approach offers better value for money if you’re a borrower, and will usually depend on how big your mortgage is and the length of the deal you’re taking.
The rule of thumb is that bigger fees are usually more justified on longer term mortgages, as they’re spread over five years rather than two for example.
>> Use our true cost mortgage calculator to compare deals
How do fees affect the cost?
To illustrate this, we’ve compared First Direct’s new two-year fixed rate for those with 40 per cent equity or deposit, which is now priced at 1.24 per cent with a £725 fee, with its predecessor.
On the new deal, monthly repayments on a £150,000 mortgage over a 25-year term would be £582.
Over the two year period this would see you pay £25,251 in interest, while the total cost over the two-year deal period is £14,687.
The lender’s previous two-year fixed rate up to 60 per cent loan-to-value offered a lower rate at 1.14 per cent but came with a £1,450 fee.
On this deal the monthly repayments were £575 – £7 a month cheaper than you’ll pay today thanks to the 0.10 per cent rise in rate.
The total interest payable would have been £23,910 – £1,341 less than the new version.
Big fees have less impact for borrowers taking a longer-term fixed rate as you remortgage less often and therefore pay fewer fees
But the total cost over the two-year deal period would have been £15,247 – a full £560 more than the new deal when you include the fee.
This makes the higher rate, lower fee version cheaper over the two year term – especially because if you choose to add the fee to your mortgage balance, you’ll pay interest on it as well. A smaller fee is therefore better in this scenario.
Big fees have less impact for borrowers taking a longer-term fixed rate as you remortgage less often and therefore pay fewer fees, plus, the fee itself is spread over a longer period.
First Direct’s new five-year fixed rate is 0.1 per cent more expensive than it was, at 1.74 per cent for those with 40 per cent equity or deposit but the fee is half, at £725.
On the same £150,000 mortgage as above, monthly repayments are £617, the total interest payable is £35,815 and, including the fee, the cost of deal over five years is £37,743.
This compares to the older version which was 1.64 per cent with a £1,450 fee, which incurred monthly repayments of £610, total interest of £34,396 and would cost £38,039 over five years when you include the fee.
Taking the new deal saves you just £296 over the five year term.
Doing the sums like this can be a bit misleading – it looks like you save less on the five-year deal, but don’t forget to factor in that if you take three two-year mortgages consecutively, you’ll pay three product fees, three valuations and three sets of legal fees – which add up.