Watch out for the wolves when you enter the mortgage forest

When homebuyers think they've secured a decent mortgage deal, they will feel entitled to celebrate.

A property is the most expensive purchase most people make in their lives, and securing a low interest repayment will usually be a priority.

Yet, in many cases, arrangement fees and other charges - often hidden or poorly explained - can end up adding thousands of pounds to a mortgage over its lifetime.

Unsuspecting buyers can easily opt for what appears to be a very reasonable headline mortgage rate - only to find, when trying to remortgage to a better deal at a later stage, that they face a punitive early redemption fee.

Or, tempted by a cheap remortgage rate, homeowners can end up paying for their "bargain" with a large arrangement fee.

Here is our guide to finding your way through the forest of fees and keeping a lid on the real cost of taking out a mortgage.

Annual interest calculations

Charging interest on your mortgage borrowing annually - as opposed to daily - is still a big moneyspinner for a handful of lenders, including the Portman and West Bromwich building societies.

When calculations are done annually, the interest that is added to repayments throughout the year is based on what you owe at the start of the year - which means you are still being charged interest on money you paid off months ago.

With a daily calculation, the interest is based on the amount you owe each day. In this way, repayments are credited immediately - cutting both the debt and the interest paid.

Nick Gardner from the broker Chase de Vere Mortgage Management points out that Portman's annual interest rate calculation has enabled it to top the best-buy tables regularly. But borrowers on its low two-year, 4.3 per cent deal will actually face higher repayments than many people who pay a higher headline rate with another lender.

Charging interest to the month end

When you switch lender in order to remortgage, you may have to carrying on paying interest to your previous lender right up until the end of the month in which you move.

A few mutuals, including the Skipton and Stroud & Swindon building societies, levy interest to the end of the month in which you redeem your mortgage, rather than having a cut-off point on the day you switch.

This can mean that if you redeem on, say, 1 May, you can still be charged interest until the 31st - so you'll pay two lots of interest.

"This is one of the nastiest stings - as you may not find out until it is too late," says Mr Gardner. "The borrower can be hit with a whole month's interest on a mortgage that has, in fact, already been paid off [by the new lender]."

One way to get round this is to plan your switch so that you complete on the last day of the month.

"But if you don't know in advance [when the transfer is taking place], or can't schedule your completion date in this way, you can be hit hard," says Mr Gardner.

Arrangement fees

The average cost of a fixed arrangement fee is around £500, but you can pay much more if the fee is based on a percentage of your borrowed sum. For example, Birmingham Midshires levies 1 per cent on some deals.

Many lenders, such as Nationwide, Northern Rock and the Woolwich, offer a "fee-free" deal where the initial arrangement fee is waived in exchange for a higher rate of interest. But borrowers who opt for such deals can waste thousands of pounds in unnecessary interest payments, says Mr Gardner.

"This is likely to prove a costly mistake," he warns, "especially on longer-term products that tie you in to a higher rate for many years."

Nationwide, for example, has a 10-year fix at 4.88 per cent with a £399 arrangement fee. But it also offers an alternative "fee-saver" option at 5.28 per cent.

If you took out a £100,000 mortgage with the "fee-saver" option, your monthly repayment would be £601.02. But if you opted to add the fee to your existing loan (rather than paying it upfront), repayments on the resulting £100,399 mortgage at a rate of 4.88 per cent would be just £579.92.

Over the 10-year term, total repayments would be £72,122 on the fee-free option, compared with £69,590 if you paid the fee.

"That's a saving of £2,532," Mr Gardner points out. "It makes no sense, therefore, to take the fee-free options on longer-term fixes and trackers. However, on a two-year fix, it can be just about worthwhile."

Borrowers must do their sums, he says, because the best option will depend on the size of the loan and whether you go for a repayment or interest-only deal.

Whenever you add fees to an existing loan, it's a good idea to try to overpay in the near future. Otherwise, even the smallest fee will generate huge amounts of interest over the years.

Exit fees

These are charged by nearly all lenders when a homeowner redeems a mortgage - or even pays it all off.

Lenders claim the fees reflect administration costs. However, there are huge discrepancies. Worse, exit fees are not fixed when you apply for your loan.

Exit fees start from as low as £35 with Britannia building society, rising to £295 with Alliance & Leicester.

Extended tie-ins

Beware of deals that lock you into an uncompetitive standard variable rate (SVR) for several years after the initial cheap offer has ended - by imposing a penalty if you try to leave.

Louise Cuming of the price comparison service Moneysupermarket.com draws attention to a seemingly attractive Portman deal, fixed at 1.79 per cent until May 2008. After that, however, you slip on to the building society's SVR, with redemption penalties until May 2012.

"If you want to change lender, you'll pay 7 per cent of the outstanding loan before May 2009, 6 per cent the following year, then 4 per cent, and 2 per cent in the final year," she says.

Higher lending charges

If you don't have much of a deposit, watch out for the higher lending charge (HLC) imposed on customers who want to borrow more than 90 per cent of the property value.

Previously known as the mortgage indemnity guarantee, it is in effect an insurance policy to protect the lender if a borrower defaults on their mortgage repayments and the property has to be repossessed.

But while the borrower is the one who pays, he or she doesn't get any protection. "It is an outrageous and outmoded charge," says Melanie Bien of broker Savills Private Finance.

She, like many critics, questions how the extra cost of the HLC can be justified - especially when a growing number of lenders have withdrawn it.

Those who do not levy the charge include Northern Rock, Nationwide, Cheltenham & Gloucester, HSBC and the Woolwich. A high loan-to-value deal that doesn't carry an HLC may be offered at a more expensive rate than one that does. But even so, you will still be better off going for a higher repayment rate without this charge.

Brokered deals

With so many fees to get your head around, and different methods of calculating interest, it can be difficult to compare one deal with another - even using the best-buy tables, such as those on page 25. So you may want to enlist the services of a broker to do the sums for you.

A broker with access to all the mortgages currently on offer will scour the market, find the best deal for your circumstances, and do all the legwork in setting up the loan.

But such a service - whether conducted face to face or over the phone - inevitably carries a price tag.

Some brokers, such as Purely Mortgages, charge a flat fee (£195), while others, such as Chase de Vere Mortgage Management and Savills Private Finance, charge a percentage of your loan amount (usually around 0.8 per cent).

That said, not all brokers levy fees. London & Country doesn't charge buyers, earning its money instead in commission from lenders whose products its customers buy.

Critics of fee-free brokers raise the question of whether customers are being recommended the best products for their needs - or products from those lenders paying the best broker commission.