Why mortgage fees are fair

Christina Jordan gives you the lowdown on everything you need to know about mortgage fees...

Mortgage borrowers don't like fees. No surprises there. Nobody wants to fork out hundreds of pounds for the privilege of arranging the biggest debt of their lives.

But what borrowers really object to is that fees have changed so much in the last decade. They all used to be around about the same price - a couple of hundred quid. But then some lenders started increasing their fees, others began offering fee-free deals and others still brought in percentage fees just to make matters more confusing.

Some people have called for the regulator to cap fees, creating a level playing field and enabling customers to better assess which deals are cheapest - after all, in the current market a deal at 4% could work out more expensive than one at 5% because of a steep fee.

But lenders and brokers argue that giving customers more choice in how they pay their mortgage is actually fairer than limiting their options.

Frankly I agree.

Fee options

Typical fees: According to financial information provider Moneyfacts, average fees have dropped since the Base Rate has remained stable at 0.5%, from an average of £944 to £925 between March and September this year. But these are the averages. The so-called best buys tend to come with higher fees and this is part of the problem. What looks like a fantastic low mortgage rate becomes less appealing when you factor in the fee.

High fees: In the current market anything up to £1,000 is pretty standard. Above that is steep in anyone's book. The dearest flat fee currently available is Bank of Scotland's £2,499 fee on its large loan product transfer range. That sounds very expensive - and it is - but I think it's decent value. On a large loan of £750,000 even a modest 0.5% percentage fee would be a lot more.

Fee-free and low-fees: At the other end of the scale are fee-free mortgages and these tend to come with slightly higher rates (but not always). They are a boon for cash-strapped first-time buyers although you could be paying more over the long run if there is a hefty premium on the rate.

Percentage fees: A fee structure where you are charged a percentage of the amount you borrow. So a 1% fee on a £100,000 mortgage will be £1,000.

These fees in particular have increased in popularity amongst lenders over the last year. Indeed according to recent research* they now account for a massive 49% of all deals. By nature they are more expensive the bigger your mortgage, though a small number are capped to stop the fee spiralling. At the other end of the scale, borrow just £50,000 and a 1% fee (£500) will look pretty modest.

Percentage fees vary from 0.4% to a whopping 2.5% with the average coming in at 0.89%*. On a typical £150,000 mortgage this equates to a fairly steep fee of £1,335.

You can't rely on rate

There are so many different types of fees it is no longer possible to look at a couple of mortgage deals and compare them on rate alone. Most lenders use fees and rates as pricing mechanisms to make up an overall deal.

So a certain mortgage, such as a two-year tracker, might have two derivations - one with a high fee and low rate, and another with a low fee and higher rate. Britannia, for example, also offers a fee-free option on most of its products as well as a low and high fee. In each case the payrate is slightly different.

As a borrower it is essential that you work out the overall cost of a mortgage taking both rate and fee into consideration. On a two-year fixed rate, for example, add up all the monthly repayments you would have to make in two years and then add the fee on top.

It makes it a bit more difficult to compare mortgages, but it's worth doing. If you are unsure, ask a mortgage broker or the potential lender to work it out for you.

Why different fees are good

Some borrowers hate the fact that varying fees mask the true cost of a mortgage but I think they are a good thing and here's why.

Mortgage borrowers are different, and the deals should be.

Say you are a first-time buyer on a decent income - enough to service mortgage repayments - but without much upfront cash. It's hard enough to save for a deposit, stamp duty, and furniture without finding £1,000 for a mortgage fee. It might suit you better to go for a fee-free or low-fee deal that comes with a slight premium on rate.

It's worth pointing out that you can usually add the fee to the mortgage but this means it costs you a lot more over the long-run as you are charged interest on it.

Alternatively, perhaps you have just inherited a lump sum big enough to cover a large deposit and a hefty upfront fee. But you may have a low income and over the longer-term may not be able to manage significant monthly repayments. You might prefer to pay the big fee needed to get the cheapest deal on the market and minimise your monthly payments.

Size matters

Another point to consider is the size of your mortgage. In general those with smaller mortgages are better off with deals that come with a low fee, and higher rate. And those with a larger mortgage are often better off paying a larger fee for a lower rate.

Let's take a look at an example, assuming a modest £100,000 mortgage (two-year fix up to 75% LTV).

First Direct has a 3.49% deal with a fee of £1,298. On a £100,000 mortgage the monthly repayments would be £500, totalling £12,000 over 24 months. Add the fee and the total cost is £13,298.

But Abbey has a fee-free 4.39% deal. On a £100,000 mortgage the monthly repayments would be £549 and the total cost therefore cheaper at £13,176. The highest rate is the cheapest deal.

However, on a £200,000 mortgage things change:

With First Direct's 3.49% deal the monthly repayments would be £1,000, totalling £24,000 over 24 months. Add the £1,298 fee and the total cost is £25,298.

With Abbey's fee-free deal at 4.39% the monthly repayments would be £1,099 and the total cost would therefore be higher at £26,376. In this case you are better off paying the higher fee.

Because borrowers are not the same in terms of their mortgage requirements, their income or other financial commitments and responsibilities, it makes sense that mortgages are different too - and as a result, there is a definite place for high fees.

*Research by Moneyexpert.com

More: Buy a home without a deposit | Don't go for a two-year tracker