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Fee-free and low-fee mortgages

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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When you decide to buy a property, you often have to pay an arrangement fee on the mortgage. This varies from one lender to the next, and some banks and building societies offer lower-fee or even fee-free mortgages.

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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. 

You’ll need to take all of these into account when comparing low fee mortgages with higher fee options, as lower fees may mean higher interest rates, which can mean you pay more overall.

What is a mortgage fee?

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.

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 the size of your loan.

You can usually choose whether to pay the mortgage fee 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. 

What is a fee-free mortgage?

A fee-free mortgage is simply a mortgage that doesn’t charge an arrangement fee. 

Banks, building societies and other mortgage providers use this as an incentive to new customers. However, fee-free and low-rate mortgages often have higher mortgage interest rates, which can make them more expensive overall. 

By contrast, a mortgage with a larger arrangement fee may have lower interest rates, but can still work out cheaper overall. This is because you will be paying interest for many years, whereas the arrangement fee is a one off payment.

Advantages of low and no-fee mortgages

  • They help reduce the cash you need immediately available when you take out your mortgage

  • You can put more money 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 may be better off paying a lower fee or no fee, as lower interest rates would have less impact on the overall cost of lower borrowing

Disadvantages of low and no-fee mortgages

  • 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

Can I remortgage with no fees?

Yes, some lenders will offer fee-free remortgages. Bearing in mind that the lower the arrangement fee, the higher the interest rate is likely to be, however, even a slightly higher interest rate can potentially add hundreds or even thousands of pounds to the overall deal. 

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

The term ‘fee-free’ typically refers to the arrangement fee only, so you would still need to consider the other fees payable when taking out a mortgage. This includes valuation fees, legal fees and stamp duty. There are some lenders who also offer each of these services for free, but completely fee-free mortgages are unusual.

The long term cost that you would end up paying over the duration of the mortgage is what you need to focus on here. This will depend on the interest rates available at the time you take out the mortgage, and the type of interest rate you choose. 

A fixed-rate deal means that your rate stays the same for an initial period, but a variable rate mortgage, such as a tracker or discounted deal is more difficult to calculate with certainty, 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. 

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 by 1% or 2%.

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 but at  a lower interest rate

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, so always compare the full cost of the deal. You can do this more easily by using the APRC (Annual Percentage Rate of Charge).

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. 

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 if there’s no arrangement fee on your mortgage you should still be prepared for other mortgage costs.

Mortgage booking fee 

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

Mortgage valuation fee

There is the cost you pay for the lender to assess the value of the property. It helps them to determine whether the property is 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 when you are buying a property - and there are even more fees involved here if you are also selling one.

Low fee mortgage FAQs

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