Some banks and building societies offer low-fee and fee-free mortgages as an incentive to take out your mortgage with them. This is particularly popular with first-time buyers, as it reduces the upfront costs of buying a home.
However, it's rare that we get something for nothing in life, and where arrangement fees are reduced or even removed completely, there's a good chance that the interest rates will be slightly higher to compensate.
Known under various names, mortgage arrangement fees are the set-up costs you pay the lender for the administration of your application. Some lenders may also refer to this as an application fee, a mortgage product fee or a completion fee.
When comparing mortgages you often see a table showing the type of rate, which could be fixed, tracker or discounted. You’ll also be shown the initial interest rate, the overall cost of the mortgage over the full term and the fees.
Arrangement fees average at around £1,000 to £2,000, however, they can be more or less expensive than this depending on the value of the property and how much you borrow.
You can usually choose whether to pay the mortgage fee or add it to your mortgage so that you don’t need to find the cash upfront. The downside to doing this is that you’ll end up paying interest on the arrangement fee for the life of the loan, making it far more expensive in the long term.
A fee-free mortgage is simply a mortgage with no fees. Usually this only means that the arrangement fee is free, although some mortgages may also offer free legal or valuation 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.
They reduce the amount of cash you need upfront when you take out your mortgage
You can put more money towards your deposit instead, which may lower your loan to value, giving you access to better rates
If you’re taking out a relatively small mortgage, you may be better off paying a lower fee or no fee. Having slightly lower interest rates would have less impact on the overall cost of your mortgage, the less you borrow
Reduced fees can make a deal look cheaper, when it may actually be more expensive overall due to higher interest rates
If you’re taking out a relatively large mortgage, you will likely be better off paying a higher arrangement fee to benefit from a lower interest rate
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.
Mortgages with no fees at all are actually very unusual, as the majority of fee-free mortgages have valuation fees and legal fees to pay - usually just the arrangement fee is 'free'. There are some lenders who also offer each of the other services for free separately, but very few will do so in addition to free arrangement fees.
It's important to focus on the long term 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 your term length.
With a fixed-rate deal your interest rate stays the same for an initial period, but a variable rate mortgage, such as a tracker or discounted deal could go up or down based on changes to the Bank of England base rate.
If the base rate goes up, your variable rate is likely to rise, which would result in higher monthly mortgage repayments. It’s impossible to predict exactly how the Bank of England base rate might change, so make sure you could still afford your repayments if the base rate were to go up.
Example: We look at what’s cheaper, a two-year fixed-rate deal for a £150,000 mortgage over 25 years, with no fee vs. with fees at a lower interest rate
A no-fee mortgage at 3.29% - monthly mortgage repayments are £734.15 for the first two years
A mortgage with a fee of £995 at 2.75% - monthly mortgage repayments are £691.97 for the first two years
The difference in repayments is £42.18 a month. The lower interest rate option saves £1,012.32 in repayments over 24 months
With the £995 fee £1,012.32 - £995 = £17.32, which is the actual saving over over two years
In the above example, the saving is fairly small, so depending on your circumstances, you might find it easier to take the fee free option. However, sometimes the savings will be much bigger, depending on the rates available at the time and the size of your loan.
In some cases it may be cheaper to pay a higher rate and no fee, so always compare the full cost of the deal. The APRC (Annual Percentage Rate of Charge) can make this a little easier to see, but won't take into account any changes in interest rate once your initial deal has ended.
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.
Remember, the interest rate is only guaranteed if you take out a fixed-rate deal.
Even no fee mortgages have other costs to be aware of, such as:
Booking fees are not often charged nowadays, but some lenders still charge them. This is an administrative cost and is usually non-refundable.
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 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.
Typically, yes they do. Low and fee free mortgages are used to entice new mortgage applicants, however, the lender will need to make up the difference somewhere, and usually this is with higher interest rates.
Which one is better for your individual circumstances will largely depend on the size of your mortgage, as larger loans tend to work out cheaper with a lower interest rate and higher fee, however, it’s important to consider all options. A mortgage broker can help you to look into the finer details of the deals and help you to compare them.
No, the size of your deposit is typically based on the size of your LTV (loan to value). Whether the deal you choose has an arrangement fee or not should have no impact on how much deposit you need.