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Fee-free and low-fee mortgages

Tom Martin
Written by Tom Martin, Content editor

Edited by Samantha Downes, Content Writer, 3 December 2021

We look at how you can pay less on your mortgage fees and what you need to be aware of when comparing low fee mortgages.
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Fee-free and low-fee mortgages

When you decide to buy a property, you will be required to pay an arrangement fee on the mortgage you take out.

Some banks and building societies will offer discounts on this, giving you a low fee mortgage or even a fee-free mortgage.

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When comparing mortgages you will often see a table showing the type of rate you will get, which could be fixed, tracker or discounted, for example.

Alongside that, you will be shown the initial interest rate, the overall cost of interest, and importantly, the fees for setting up the mortgage.

What is a mortgage fee?

When you take out a mortgage the mortgage lender will charge a setup fee, also known as the mortgage arrangement fee. Normally, when taking out a mortgage you choose whether to pay the mortgage fee upfront or add it to your mortgage.

Adding it to your mortgage could mean you end up paying back more in interest over the entire mortgage term, and should generally be avoided if possible.

What is a fee-free mortgage?

Banks, building societies and other mortgage providers look to lure in customers with fee-free mortgages. Lenders may also offer a low-interest rate or a low mortgage fee.

In truth, there is no rule for which type of mortgage will work out to be a cheaper deal for you. What tends to happen is that the mortgage with a low-interest rate will have a higher mortgage arrangement fee.

And a low-fee mortgage will tend to have a higher interest rate. You could even find a mortgage with no fee, but again, expect to find that the interest rate is higher than many others.

Fee-free mortgage or low-interest rate mortgage?

Hunting for the best fee-free mortgage or a low-fee mortgage means shopping around for mortgages and comparing the different deals to decide what works best for you in your financial circumstances.

For example, if you can't afford a mortgage fee, then weigh up if a low-fee or a no-fee mortgage would be better.

The rates of interest tend to be higher than those mortgages with arrangement fees, but is that offset by the lack of an upfront setup fee?

Can I remortgage with no fees?

Some lenders will offer you a fee-free mortgage which can be tempting. Many arrangement fees can be between £1,000 and £2,000, but the costs of even slightly higher interest rates can potentially rack up thousands of pounds over the next five years or so.

Even if you added the mortgage fee to your mortgage term, it could work out cheaper than going for a fee-free mortgage with a higher rate of interest.

What are the best fee-free mortgages?

The most important thing is to always calculate what your monthly mortgage repayments will be under each mortgage.

Normally, you will have a certain degree of understanding of what your monthly mortgage repayments will be based on the cost of interest.

Unfortunately, mortgages can only guarantee the interest rate for the length of your fixed-rate deal, which is usually two or five years.

After that, you will have to revert to the mortgage provider's variable rate, which is usually based on the Bank of England's current base rate.

How do I know how much my mortgage will cost?

The base rate set by the Bank of England is how much banks and other lenders are charged for borrowing. As the Bank of England's base rate changes, the mortgage provider's variable rate is likely to change, too.

That means if the base rate goes up, your variable rate is likely to rise, which would result in higher monthly mortgage repayments.

The cost of mortgages with no fees

It would be impossible to predict exactly how the Bank of England interest rate might stand in 10 to 15 years, so it's best to simply focus on what your monthly mortgage costs will be for the next five years or so.

To be as prepared as possible, do some calculations on the costs and assess if you could still afford your mortgage repayments in ten years' time if the base rate were to rise significantly.

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

When you consider a fee-free mortgage, you need to calculate what would happen if the Bank of England raised its base rate after you had taken out a fixed-rate mortgage.

For example, on a two-year fixed rate deal for a £150,000 mortgage, would a mortgage with no fee or a mortgage with a low-interest rate be cheaper?

Here are some example calculations we did on mortgages with no fees versus mortgages with fees:

  • On a no-fee mortgage at 4.4%, your monthly mortgage repayments would be £620.56 for the first two years.

  • On a mortgage with a fee of £1,500, and a lower interest rate of 3.6%, your monthly mortgage repayments would be £581.75 for the first two years.

The difference in repayments is £38.81 per month. Over 24 months that's a saving of £931.44 in terms of repayments if you were to choose the lower interest option. 

But once you take the £1,500 fee into account, the picture changes. Overall, you would have paid £568.56 more if you had opted for the lower interest rate with an upfront fee.

This is why it is important that you do your calculations before applying for a mortgage.

Sometimes it’s cheaper overall to pay a higher rate with no fee rather than paying the arrangement fee and choosing a lower interest rate.

Can a fee-free mortgage save you money?

Mortgages with no fees will make more of an impact on smaller mortgages.

But there are so many variables, so it's best to keep shopping around and keep doing your calculations.

What other mortgage fees should I watch out for?

Just because there is no arrangement fee on your mortgage that does not mean you shouldn't prepare for other mortgage costs.

Mortgage booking fee 

The most common mortgage fee aside from the arrangement fee is the booking fee, also known as the application fee. This is an administrative cost and is usually non-refundable.

Mortgage valuation fee

There is also the valuation fee, which you will have to pay to properly assess the value of the property.

This will help the mortgage provider determine whether or not the property is really worth the mortgage value you are applying for.

Besides these fees, you will come across various legal fees, which are relatively smaller but all add up.

If at the end of your fixed-rate deal, you want to switch mortgage providers to continue paying a low rate of interest, you will probably have to pay an early repayment fee. So before getting a mortgage, assess how important it is to you to keep paying it off at the rate you're getting.

Ideally, you want to have a little bit of flexibility to pay slightly more just in case the fees for switching or arranging new mortgages become too expensive.

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