Should you pay a fee for a decent mortgage?

by John Fitzsimons on 23 September 2010  |  7 comments
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Some of the best mortgages in the market carry huge product fees. Is it worth paying a high fee in order to secure a competitive mortgage rate?

Today's debate is on mortgage product fees, which can vary from thousands of pounds to absolutely nothing. Is it right that you have to shell out so much in an arrangement fee? And is it financially worthwhile to do so?

We asked Alex Hammond, PR, brand and communications manager at mortgage lender Kensington, and Nick Cooper, mortgage advisor at lovemoney.com.

Alex Hammond, PR, Brand & Communications Manager at Kensington

Product fees help spark mortgage innovation

Any healthy market needs to provide consumers with choice and while paying a fee to take out a mortgage that you will then be paying interest on for up to 25 years may initially seem like an odd concept, it is an excellent example of consumer choice.

There are costs associated with mortgage lending and lenders need to cover this cost with the way that they price their products. Charging a fee on a mortgage product effectively subsidises the headline rate and can enable a lender to offer a lower rate then they would otherwise be able to do. If there were no fees charged on products at all then rates would most probably be higher across the board.

Of course, whether it is a fee or a rate it is all money you need to pay the mortgage lender so how does that amount to consumer choice?

Well, depending on the way a product is structured could benefit some customers rather than others. So, by way of a crude example, if one customer was borrowing a large amount it may benefit them to choose a product with an upfront fee in exchange for a lower rate, whereas for another customer taking a smaller loan, a set fee may be disproportionate to the benefit they get from a lower rate and they might be better off choosing a product with no fee and a higher rate.

The point is that everyone is different and product fees help create different types of mortgage products to suit different circumstances. In some ways it is the equivalent to airlines. Some low cost airlines offer strikingly low fares, but then supplement these fares with other charges for pretty much everything, from checking in luggage to priority boarding, whereas other carriers have continued with the more traditional method of a higher upfront fare that is inclusive of other services. There is demand for both types of carrier as the different formats suit different travellers with different circumstances.

When it comes to mortgages, the trick is finding the right product for your circumstances, and this is where independent professional advice comes in. Unlike choosing a flight, which is only likely to impact on a few hours of your life, choosing the right mortgage is a far more significant decision and, with so many different types of products to suit different circumstances it is important to get guidance from a qualified adviser to help you make the right choice.

Nick Cooper, mortgage advisor, lovemoney.com

You don't have to pay a huge fee to secure a great deal!

One thing to note is that there is not a single product fee to be aware of - there are quite a few different fees that lenders like to add onto their products. The best way to identify the fees associated with your deal, is to make sure you read Section 8 of you KeyFacts Document (this should be given to you with any mortgage quotation you receive) along with asking the lender or broker. The main ones are:

Arrangement fees - the amount of money the lender charges to ‘arrange’ the mortgage for you.  These can be either paid upfront or added to the mortgage loan.  If the latter option is chosen be aware that the fee will accrue interest and be spread over the full term of your mortgage, hence increasing its cost!  Also some lenders now require this fee to be paid even if you apply for the deal and later decide not to go ahead with it.

Booking Fee – Some lenders also charge booking fees on their deals. They charge this fee at the point of application, in return for them ‘booking’ the money for you at the rate quoted. This fee is non-refundable, so if you are turned down for the mortgage or you find a better deal you won’t get it back and you’ll be out of pocket.

Valuation Fee – This is the fee lenders charge to send a surveyor around to value your property. Normally remortgage deals are free from valuation fees however some do still charge. This fee is paid at application and is non refundable once the valuation has been carried out, even if the property is deemed not suitable or not of high enough value (down valued). Down valuations are more common place in the current market.  If you are not sure of your properties value, try and find a lender who will do this for you for free!

Final Repayment Charge – Some lenders still charge an administration fee for closing down your mortgage account, ever after your early repayment period has ended!  They used to charge this fee for releasing your properties Title Deeds from their vaults at the bank.  Once the Land Registry went on-line there was no need for lenders to hold onto the Deeds and hence no need for them to charge a Deeds release fee.  However some lenders decided to just change the name and carry on charging it – crafty! 

The lowest rate is not always the cheapest deal!

A lot of people believe the lower the rate the better the deal.  However this is not always the case. In fact a lot of the time the lower the rate the higher the fees and the more expensive the deal becomes.

For example, my client has a mortgage of £100k which he is looking to repay over 25 years, he also has £1500 spare for the cost of fees.  We have two products available:

Option A is a 3.59% fixed-rate for two years with a £999 arrangement fee and £300 valuation fee. Option B is a 4.10% fixed-rate for two years, with no arrangement fee, and a free valuation.

Option A costs £505.46 for 24 months, which comes to £12,131.04. Add on the £1,299 fees and the total cost over the two years is £13,430.04

Option B costs £533.37 for 24 months, which comes to £12,800.88, but you don’t have any fees to worry about.  So as you can see, although Option A has the cheaper rate, Option B is cheaper over all because of the lower fees.  

Remember, if the rate’s great, check the fees suit your mortgage balance before taking the plunge!

So what do you think? Are product fees just part of the mortgage process? Or are they a rip-off? Let us know your views via the comment box below!