Mortgage fees have seen a 60% increase in the last two years. But can the big fees get you the best rates?
When you’re on the hunt for a mortgage many will be focused on finding the best rate around. But lower rates can carry enormous fees that make comparing the true cost of a mortgage extremely difficult.
According to Moneyfacts the average fee buyers are expected to pay for fixed and tracker mortgages has gone up by over 60% since 2010. In fact the average mortgage fee now stands at an unbelievable £1,511.
So why would anyone choose a mortgage with this added cost when there are plenty of fee-free options available?
Why choose a mortgage with a fee?
Fees can vary greatly across lenders but generally they range from £400 to £2,000.
The costs a bank incurs when setting up a mortgage is passed onto you, but in return for absorbing these charges borrowers usually have access to lower rates than those charged on fee-free mortgages.
This makes finding the best deal on a mortgage very difficult.
For example First Direct has a two-year fixed rate offer of 4.19% at a 90% loan-to-value with arrangement fees totalling £999. But if you decided you couldn’t face the fees the rate shoots up to 4.89% - an increase of 0.7%.
If you took out a loan of £150,000 over 25 years with the First Direct fee-charging deal, you could expect monthly mortgage payments of £807.58.
But on the comparable fee-free option, at 4.89% your repayments rocket to £867.30 a month, almost £60 a month more.
Fee or no fee?
Remember with most fees you have the option of paying them upfront or adding them to the amount you are borrowing.
In general for a large mortgage a big fee can be beneficial to secure a lower rate and keep the overall interest you pay back down.
With smaller mortgages though, a high fee will just add to your loan in a more noticeable way, so it may work out cheaper to reduce the initial costs, even if it means paying slightly more each month.
14 mortgages with big fees
Take a look at a range of mortgages that carry a fee and the sort of rate you can get, arranged by largest fee first.
|
Lender |
Type |
LTV |
Rate |
Fees |
|
Two year fixed |
60% |
2.64% |
£1,999 |
|
|
18 month tracker |
75% |
4.19% (base rate + 3.69%) |
£1,495 |
|
|
Ten year fixed |
80% |
4.99% |
£1,198 |
|
|
Five year fixed |
80% |
4.19% |
£1,198 |
|
|
Two year fixed |
85% |
3.99% |
£999 |
|
|
Lifetime tracker |
90% |
4.79% (base rate + 4.29%) |
£999 |
|
|
Three year fixed |
75% |
3.89% |
£999 |
|
|
Two year fixed |
85% |
3.99% |
£999 |
|
|
Two year tracker |
80% |
3.49% |
£999 |
|
|
Ten year fixed |
75% |
4.79% |
£999 |
|
|
Two year tracker |
60% |
3.34% (base rate + 2.84%) |
£995 |
|
|
Two year tracker |
75% |
3.09% (base rate + 2.59%) |
£995 |
|
|
Four year fixed |
60% |
4.09% |
£995 |
|
|
Five year fixed |
85% |
4.49% |
£995 |
Table correct as of 13/06/2012
As you can see HSBC charges nearly £2,000 for a two-year fixed mortgage, but in exchange offers an excellent 2.64% rate.
Smaller fees
One way to get the fee to shrink on a mortgage, while still having access to the great rate, is to be an existing customer. Britannia for example waives the fee if you are already with the mutual.
Similarly existing current account customers can get discounts on the fees. For example, on the HSBC five year fixed deal with a LTV of 90% and a rate of 4.79%, Advance current account customers can pay £399 rather than the usual £999. And if you are a Premier current account holder, the fee drops to £299.
If you are not a customer and don’t want to pay a fee, the rate rises to 4.99%.
Do the maths
It is clear to see that when comparing mortgage products you should always look at the total amount you are likely to repay, including the fees and any incentives (like free legal fees) over the term of the loan. Only then can you see if the product is the best value for you.
If doing the maths is making your head hurt, you can always get in touch with one of our fee-free mortgage brokers and get some helpful advice on which type of mortgage would be best for you.
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At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.
This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.
Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.
Your home or property may be repossessed if you do not keep up repayments on your mortgage
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