It’s normal – and quite sensible – to lean towards the lowest rate available when sizing up which mortgage to apply for.
After all, the lower your mortgage rate is, the less interest you’ll have to pay each month, so it’s hard to see the downside to snapping up the lowest rate possible.
But there’s another important factor you need to take into account when choosing a deal: mortgage fees. While mortgage rates are thankfully starting to ease, figures from Moneyfactscompare.co.uk indicate that the average mortgage fee at the end of November was £1,108, a £21 increase from the start of the month.
In fact, some of the lowest rate mortgages often come with the heftiest fees attached, which can make a seemingly-perfect deal a lot less tempting once you’ve done the maths.
In this article, we’ll explain how mortgage fees can offset the benefit of a low-rate mortgage and give you some tips for finding the right mortgage to suit your needs.
What are mortgage fees?
It’s not just the loan capital and the interest you need to think about when working out how much your mortgage will cost you. Lenders will normally charge fees just for setting up your mortgage in the first place, and these can run into hundreds or sometimes even thousands of pounds.
The highest fee normally associated with setting up a mortgage is known as the arrangement fee, which is paid to secure the mortgage and can be anything from a few hundred pounds to over £2,000. Other fees may include a booking fee (or application fee) and fees for setting up your mortgage account.
Lenders usually allow you to add the arrangement fee or other mortgage fees to the loan itself if you can’t afford to pay upfront. Be wary of this option, as not only will it not make the loan any cheaper, as you’ll still have to pay off the fee, it will actually end up costing you more, since you’ll be paying interest on the fee in addition to the loan. While it can sometimes be practical to spread costs out like this if you can’t cover the fee upfront, make sure you weigh up all of your options before taking this route, and seek advice from a broker if you need help crunching the numbers.
There are plenty of additional costs to take into account as well. For example, if you are buying a property and not just remortgaging, you’ll usually not only have to pay fees for a valuation, but also for surveying, conveyancing, as well as Stamp Duty. Our article Mortgage fees and costs explained outlines all the different fees and costs associated with setting up, paying and closing a mortgage in more detail.
What difference do mortgage fees make?
Put simply, mortgage fees – and arrangement fees in particular – can sometimes be so expensive that a higher rate mortgage with lower fees can turn out to be a more cost-effective option than a lower rate deal with steep fees.
While you should always be on the lookout for the lowest rates possible in your search for a suitable mortgage product, the arrangement fee is typically the second thing you should be looking at. In fact, as a general rule, the lower the mortgage rate, the higher the arrangement fee tends to be, which can make striking the right balance and getting good value very frustrating!
For example, let’s say you have the choice between two five-year mortgage deals for a £150,000 mortgage to be paid over 15 years. One lender is offering a 4.50% deal, the other is offering 4.60%, but these deals have arrangement fees of £2,000 and £500 respectively
If you pick the 4.50% deal, your monthly payments (once the fee is added to the loan) would amount to £1,162 (this assumes your rate stays the same throughout the mortgage term), with the total you’ll repay over the 15 year term coming to £209,249. However, taking the 4.60% offering with the lower £500 arrangement fee would cost you £1,159 a month. Over the 15-year term, you’d pay back a total of £208,648, so £601 less than if you’d opted for the lower rate deal with a more expensive fee.
As a general rule, if you’re taking out a large mortgage, the chances are you’ll be better off with a lower rate mortgage with higher fees, than with a higher rate mortgage with lower fees. Conversely, if your mortgage is relatively small, then a slightly higher rate deal but with a lower arrangement fee may work out to be more cost-effective.
How to avoid high mortgage fees
If you are searching for a mortgage deal, make sure to pay close attention to the fees involved. The best way to avoid losing money to eye-watering mortgage fees is to compare all of your options and work out whether the lowest rate available to you will actually save you money.
The smaller the loan or shorter the term, the less money you are likely to save on account of a low-rate deal, so a high fee can hurt far more than it helps. Bear this in mind if, for example, you are looking to remortgage your home.
As in our example earlier, try using a mortgage calculator to work out how much you would save over the fixed-rate term between two different deals, then see whether the arrangement fee is cheaper on the higher rate. If the answer is yes, and the difference between the two fees is higher than the savings you would make from the lower rate, you may be better off opting for the higher rate.
Where to get mortgage advice
If you are unsure about which mortgage option makes the most sense for you, aren’t confident choosing a deal, or just need more help making sense of the mortgage market, the most sensible thing may be to seek professional advice.
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