Borrowers warned to look beyond headline mortgage rates

This week Lloyds Banking Group launched a new tracker mortgage at just 1.49 per cent above Base Rate, meaning it currently costs just 1.99 per cent - on the face of it a market leading rate. However, this deal has a fee of 3 per cent, the highest percentage fee on a residential mortgage, adding an extra £4,500 to a £150,000 mortgage, totaling up to a real rate of 4.33 per cent.

Analysis from moneysupermarket.com shows the arrangement fee charged on a mortgage can be a crucial factor in determining the overall cost of the deal. For example, the new Lloyds tracker product would cost an extra £2,600 over two years compared to Alliance & Leicester's tracker mortgage at 2.49 per cent with a flat fee of £995. ING Direct's two year fixed rate deal at 3.44 per cent works out £1,176 cheaper as it carries a £595 fee.

ING Direct's low fee means the overall cost of this mortgage deal can come in cheaper than products such as Yorkshire Building Society's 3.09 per cent fixed rate deal. This product carries a fee of £1,195, more than double the ING Direct fee - as such, for mortgages of £130,000, you're better off going for the higher rate, but lower fee option.

Hannah-Mercedes Skenfield, mortgages channel manager at moneysupermarket.com, said; "Although we have started to see a welcome improvement in the mortgage market, with the number of products increasing, and rates starting to fall, we are still seeing some products being promoted for marketing impact, rather than real borrower benefit. Using high fees enables lenders to showcase extremely low rates without losing any of the profit.

"The attraction of a mortgage deal with 1.99 per cent splashed across it should not tempt potential borrowers, as a three per cent arrangement fee means this deal is only ever likely to be the best option for you if you're looking at a mortgage of less than £50,000.

"The size of the arrangement fee plays an important part in the overall cost of a mortgage. A more expensive fee may well be worth paying in order to secure a low rate on a large mortgage, but only if that fee is a fixed amount. Mortgage products with percentage fees rarely stand up to those with flat fees, even if their rates are considerably lower."