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.
When you decide to buy a property, chances are 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.
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.
The mortgage set up fee, also known as the mortgage arrangement fee, is the cost the bank or building society charges for setting up the mortgage. Normally when taking out a mortgage you would pay the mortgage fee up front, but you could add it on to your mortgage.
However, this would obviously mean paying back more in interest over the entire mortgage term, and should generally be avoided if possible.
Banks, building societies and other mortgage providers look to lure in customers with either 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 not as cheap as some of the lowest rates on the mortgage market.
Fee-free mortgage or low interest rate mortgage?
Essentially it comes down to shopping around for mortgages and comparing the different deals to decide what works best for you and your financial circumstances.
For example, if you can’t afford to pay for a mortgage fee, then weigh up if a low fee, or a no fee mortgage will be better.
The rates of interest tend to be higher than those mortgages with arrangement fees, but would it still be worth it if you were able to avoid the up front cost of setting up the mortgage?
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 on the fixed deal on your mortgage.
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.
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 give you a level of certainty on the interest rate for the length of the fixed rate deal, which is usually two or five years long.
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”.
The base rate set by the Bank of England is the rate banks and other lenders are charged. As the Bank of England’s base rate changes the mortgage provider’s variable rate is likely to change.
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 change ten to 15 years from now, 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 were the Bank of England base rate to rise significantly.
Then do this to see if you could afford it if you were to take out a mortgage with no fees. Would the higher interest rate but no mortgage fee be worth it even if the Bank of England base rate pushed it up higher after the fixed rate deal?
For example, on a two-year fixed rate deal for a £150,000 mortgage, would it be cheaper on a mortgage with no fee or a mortgage with a low interest rate?
Here are some example calculations we did on mortgages with no fees and 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 minus the mortgage fee.
However, with the fee included at £1,500 for a lower interest rate, you would still have saved £568.56 on the no mortgage fee mortgage.
Sometimes one can work out cheaper than the other over the long term, so it is really important that you do your calculations before applying for a mortgage.
You might find that taking out a larger mortgage will give you bigger savings when you opt to pay the arrangement fee and get a lower interest rate.
Generally, mortgages with no fees will make more of an impact to how much you save if you are taking out a smaller mortgage.
But there are so many variables, so it’s best to keep shopping around and keep doing your calculations.
Other mortgage fees to 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.
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.
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 provider 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.
- Fixed rate mortgages The advantages and disadvantages of a fixed rate mortgage
- Fixed rate or variable rate mortgages Which one is best for you?
- Remortgaging Our guide to what you need to bear in mind when remortgaging