By Emma Lunn

It's not just the stores which are kicking off 2012 with bargains. Lenders are trying to attract home owners and buyers through their doors too.

The New Year has already seen several fee-free mortgages launched onto the market, looking to lure in borrowers put off by big upfront fees. But are fee-free mortgages really as good as they seem?

Both Clydesdale and Yorkshire banks and the Halifax are offering fee-free deals at the moment; Clydesdale and Yorkshire's deals are aimed at mainstream borrowers while Halifax is targeting first-time buyers.

With many other mortgages arrangement fees regularly run into four figures. Although some lenders charge fees of between £500 and £999, a handful of lenders have arrangement fees of more than £2,000 in order to give borrowers access to the best rates.

Buy-to-let (BTL) mortgages in particular often come with the highest fees. For example, Hinckley & Rugby building society's BTL two-year fix at 2.99% has a massive £2,495 fee.

Do the maths

The range of fees and rates on offer mean borrowers need to do the sums before choosing a mortgage. In some cases a fee-free deal can work out to be more expensive over the term of the mortgage than a deal with a fee attached, but in other circumstances the opposite is true.

When comparing deals, borrowers need to work out the total cost over the length of any tied-in period, so for a two-year fixed deal this will be two years. This involves working out the monthly payments then adding on the fee.

For example, let's say a borrower opts for Clydesdale's fee-free two-year fix at 3.49% at 75% loan-to-value (LTV) and has a £200,000 mortgage. The borrower will pay £24,243 over two years based on a 25-year term on a repayment basis.

But choosing Mansfield building society's two-year fix at 2.79% with a £1,499 fee, also available at 75% LTV, will mean paying £23,936 over two years, so that's £307 less.

However, if the borrower had a bigger deposit and qualified for Clydesdale's 3.29% two-year rate at 65% LTV, the fee-free deal would work out cheaper than the Mansfield mortgage with a fee attached.

This highlights the importance of doing the sums; for a two-year deal borrowers need to work out the monthly cost of a mortgage – you can do this on our mortgage calculator. Then multiply the answer by 24 (months) and add on the fee. This gives the total two-year cost.

Generally, the bigger the mortgage, the more important the rate and the less important the fee. However, there is no particular cut-off point for when the fee becomes less important so borrowers will need to do a series of calculations to work out the best deal for them.

Be careful

Most lenders will give borrowers the option to add any fee to the loan amount. However, bear in mind that if you do this you'll be paying interest on the fee amount over the whole term so it's rarely a good idea.

Paying interest of just 3% on £1,500 over a 25-year term would add more than £2,100 to your total interest bill. A borrower would be better off paying the upfront fee with a 0% purchase credit card and paying it off during the interest-free period, than adding it to the home loan. Right now, the most competitive 0% purchase credit cards are the the Tesco Clubcard Credit Card and the M&S Credit Card, both of which offer 15 months interest-free – just ensure you do pay off the full balance before the 0% period is up.

Borrowers also need to bear in mind that lenders don't just charge arrangement fees. Many also charge booking, valuation and legal fees too. All of these need to be taken into account when working out the best deal and total costs.

As well as upfront fees, borrowers can be asked to pay a redemption or exit fee once the mortgage is paid off. This can be several hundred pounds so it's worth checking at the application stage. A good broker can advise you about fees and how they affect the total overall cost of your mortgage. You can talk to one of our fee-free brokers at mortgages.co.uk.

Finally, bear in mind that lenders offered some of their cheapest mortgage deals last year, making homeowners' monthly mortgage repayments in 2011 the most affordable in ten years, according to Barclays. So even if you're opting for a mortgage with a fee attached, you're still likely to be getting one of the most competitive deals we've seen in a decade.