When you decide to buy a property, you might be required to pay an arrangement fee on the mortgage you take out. But some banks and building societies offer low-fee mortgages or even fee-free mortgages, which could work out cheaper overall.
When comparing mortgages you often see a table showing the type of rate you will get, which could be fixed, tracker or discounted. Alongside that, you’ll be shown the initial interest rate, the overall cost of the mortgage and, importantly, the fees for setting up the mortgage.
When you take out a mortgage, you might be charged a set-up fee, known as a mortgage arrangement fee. These fees can be as high as £1,000 to £2,000.
You can usually choose whether to pay the mortgage fee upfront or add it to your mortgage. Adding it to your mortgage means you won’t need to find the cash upfront, but the downside is you’ll end up paying interest on it for the life of the loan, making it far more expensive.
A fee-free mortgage is simply a mortgage that doesn’t charge an arrangement fee.
Banks, building societies and other mortgage providers look to lure in customers by advertising low mortgage rates. But what often happens is that these low-rate mortgages have higher mortgage arrangement fees, which can make them more expensive overall.
By contrast, a low-fee or no-fee mortgage might have a higher interest rate than others to offset the money the lender loses as a result of the reduced fee. But it may work out cheaper overall.
Mortgages with low or no fees have a number of advantages:
If you have a limited amount of cash available when you take out your mortgage, you can save on the mortgage fee
You can use more of your money to go towards your deposit, which may give you a cheaper mortgage deal by lowering your loan to value
If you’re taking out a relatively small mortgage, you could be better off paying a lower fee or no fee rather than lower interest
Watch out for the following pitfalls if you’re considering a low or no-fee mortgage:
Reduced fees can make a deal look cheaper than others, but the deal may be more expensive overall because it has a higher interest rate
If you’re taking out a relatively large mortgage, you could be better off taking out a deal with higher fees and a lower interest rate
Yes, some lenders will offer you a fee-free remortgage, which can be tempting. Many arrangement fees can be between £1,000 and £2,000, but the costs of even a slightly higher interest rate can potentially add hundreds or even thousands of pounds to the cost of your mortgage over the initial deal period. So you’ll need to do some calculations to see which works out cheaper overall.
The amount you would end up paying for a no-fee mortgage depends mainly on the interest rate. But you’ll only know this for sure if you take out a fixed-rate deal, where your rate stays the same for an initial period - usually between two and five years.
If you take out a variable rate mortgage, such as a tracker or discounted deal, how much you’ll end up paying is uncertain as your rate could go up or down according to changes in the Bank of England base rate. This is the rate the Bank of England charges other banks and lenders for borrowing from it.
That means 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 it's best to simply focus on what your monthly mortgage costs will be initially and then make sure you could still afford them if the base rate were to go up by 1% or 2%.
So, on a two-year fixed-rate deal for a £150,000 mortgage over 25 years, would a mortgage with no fee or a mortgage with a lower interest rate be cheaper?
Here’s an example that shows two currently available mortgages: one with no fees and one with fees:
On a no-fee mortgage at 3.29%, your monthly mortgage repayments would be £734.15 for the first two years.
On a mortgage with a fee of £995 and a lower interest rate of 2.75%, your monthly mortgage repayments would be £691.97 for the first two years.
The difference in repayments is £42.18 a month. If you were to choose the lower interest rate option, you would save £1,012.32 in repayments over 24 months.
Once you take the £995 fee into account, you would end up paying £17.32 less over the two years if you opted for the lower interest rate with an upfront fee.
As you can see, it’s sometimes worth paying a fee to get a lower interest rate. At other times, it may be cheaper overall to pay a higher rate and no fee. For this reason, it’s important to do your maths before applying for a mortgage.
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, it's best to shop around and calculate the overall costs, taking the interest rate and fees into account.
Remember, though, that the interest rate is only guaranteed if you take out a fixed-rate deal.
Even if there’s no arrangement fee on your mortgage you should still be prepared for other mortgage costs.
Aside from the arrangement fee, you may have to pay a 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 for the lender to assess the value of the property. This helps it determine whether the property is worth enough to offer adequate security for the size of the loan you want.
Besides these fees, you’ll also have to pay legal fees to a solicitor or conveyancer for the legal work involved if you are buying a property - and more if you are also selling one.