Building societies vs banks - battle of the mortgage deals

A comparison of mortgages offered by building societies versus banks shows that customers should not be blinded by headline rates on offer as high fees could mean paying more for borrowing than is necessary, according to research by MoneySupermarket.

Analysis by the comparison site found when comparing the average two-year fixed rate mortgages from building societies and banks similar rates are on offer (4.15 per cent and 4.22 per cent respectively), but on closer inspection there is a big difference between the fees attached. Overall, building societies come out on top with much lower arrangement and booking fees which could help to save consumers over £700 over the term of the mortgage deal. It's a similar story with five-year fixed rate mortgages, although banks are offering a lower average interest rate at 4.62 per cent when taking into account the higher fees, consumers could be saving more than £200 if they went with a building society.

However, the banks trump the building societies when it comes to the cost of mortgages specifically for first time buyers. Set up costs are often a more important factor for first time buyers as they are likely to have less cash available to pay for the additional upfront fees. The difference between the top rate for a two-year fixed mortgage with a 90 per cent LTV from First Direct and Chelsea Building Society is 0.2 per cent but when the fees are factored in, there is an overall saving to be made of £1,000 by going with First Direct. This is more marked with five-year fixed rates where opting for NatWest's mortgage rather than that from Chelsea Building Society could result in a saving of £3,500 over the term of the deal. 

Clare Francis, mortgage expert at MoneySupermarket said: "When looking for a mortgage, don't just go to the big banks as there are some great deals available from smaller lenders too and it's really important to get the best product as it could literally mean the difference in cost of thousands of pounds.

"What's more, the deal with the lowest rate of interest won't necessarily work out to be the cheapest. This is because set up fees can have a significant impact on the overall cost of a mortgage and they vary considerably.

"It can work out cheaper to opt for a product with a higher rate in return for lower set up costs - it will depend on the size of the loan. Therefore when comparing mortgages you need to calculate the total amount you'll pay over the term of the deal - monthly repayments plus fees - in order to work out which will be the best value for you."