Fee-free and low-fee mortgages

What is a mortgage fee?

When you are setting up a mortgage, your lender will charge a fee to cover the administrative costs of the application. This charge is most commonly referred to as a mortgage arrangement fee, though you may also see it called an application fee, mortgage product fee, or completion fee.

Arrangement fees average at around £1,000 to £2,000. However, the amount can vary depending on the value of the property and how much you borrow.

When comparing mortgages you'll typically see a breakdown that includes the interest rate type (which could be fixed, tracker or discounted), the initial interest rate, the overall cost of the mortgage over the full term and any associated fees. 

How do I pay mortgage arrangement fees?

You generally have two options for paying the arrangement fee:

• Pay the fee upfront. You'll need to find the money directly from your own funds, which can be tricky if you're short on upfront cash but it will save you paying interest on the fee.

• Add the fee to your total mortgage loan. While this can save you from finding the cash upfront, you will end up paying interest on the arrangement fee for the life of the loan, making it more expensive in the long term.

What is a fee-free mortgage?

A fee-free mortgage typically means that the lender has waived the arrangement fee or product fee. However, it's rare for a mortgage to have no fees at all, as you'll still likely need to pay for other costs such as valuation fees or legal fees. Although some mortgage lenders may offer free legal or valuation fees separately, they're less likely to do so in addition to free arrangement fees.

Mortgage lenders offer no fee mortgages as an incentive to new customers. However, fee-free and low-fee mortgages often have higher interest rates than those with arrangement fees. This means that, although the initial outlay is lower, the actual mortgage could still be more expensive overall. 

By contrast, a mortgage with a larger arrangement fee may have lower interest rates, and can, therefore, work out cheaper overall. This is because you typically pay interest on a mortgage for many years, whereas the arrangement fee is a one-off payment.

Can I remortgage with no fees?

Yes, some lenders will offer no fee remortgages. However, much like when you took out the initial mortgage, the lower the arrangement fee, the higher the interest rate is likely to be.

As many people remortgage for the purpose of getting a lower interest rate, a remortgage with no fees won't necessarily always allow you to achieve the maximum savings. If you're remortgaging to release equity, however, this will be less important, as you're likely already raising your LTV with the higher loan.

How much would I pay for a no-fee mortgage?

It's important to focus on the total cost over the duration of the mortgage, as well as the initial set up costs. How much you'll pay overall depends on the interest rates available to you when you take out the mortgage, the type of interest rate you choose and the length of your mortgage term.

With a fixed-rate deal, your interest rate and therefore your monthly payments remain the same for an initial period. With a variable rate mortgage, such as a tracker or discount mortgage, your interest rate could go up or down, often in line with changes to the Bank of England base rate.

Comparing the costs: an example

To illustrate the importance of comparing mortgage deals carefully, let's look at an example of a £150,000 mortgage taken out over 25 years on a two-year fixed-rate deal.

Option one: No-fee mortgage at 3.29%

Monthly mortgage repayments would be £734.15 for the first two years

Option two: Mortgage with a £995 fee at 2.75%

Monthly mortgage repayments would be £691.97 for the first two years

At first glance, the lower monthly payment of the second option is appealing. Over the two-year fixed period, the difference in repayments is £42.18 per month, adding up to a saving of £1,012.32 over 24 months. However, once you subtract the £995 arrangement fee, the actual saving over the two years is only £17.32.

In the above scenario, the saving is fairly small. So, depending on your circumstances, you might prefer the convenience of the fee free option. But in other cases, depending on the size of your loan and the rates available at the time, the savings from a lower interest rate can be more substantial.

The key is to always compare the full cost of the deal, including both fees and interest. The APRC (Annual Percentage Rate of Charge) can make this a little easier to see, as it gives an indication of the overall cost. However, remember that the APRC won't take into account any changes in interest rate once your initial deal has ended.

Can a fee-free mortgage save me money?

Mortgages with no fees will make more of an impact when it comes to smaller mortgages. However, as there are so many variables to consider, calculate the overall costs and compare low-fee mortgages with their higher fee counterparts before making a final decision. 

And, remember, the interest rate is only guaranteed if you take out a fixed-rate deal.

What other mortgage fees should I watch out for?

Even no fee mortgages have other costs to be aware of, such as:

Mortgage booking fee 

Booking fees are not often charged nowadays, but some lenders still charge them. This is an administrative cost and is usually non-refundable.

Mortgage valuation fee

This is the cost you pay for the lender to assess the value of the property. It helps them to determine whether it's worth enough to offer adequate security for the size of the loan you want.

Legal fees

Legal fees are payable to a conveyancer for the legal work involved in buying a property - and there are more costs involved here if you are also selling one.