Average mortgage fee is more than £1,000!

The size of the fee you have to pay to secure your mortgage has rocketed by 17% over the past 12 months. Is it worth focusing on those mortgages that don't charge an up-front fee?

The biggest mortgage dilemma that borrowers face is undoubtedly working out the type of mortgage to go for, whether to take the risk of a variable rate or settle for the (more expensive) security of a fixed rate.

However, the next big decision for many is whether it’s worth shelling out on a product fee for the sake of a lower rate.

According to Moneyfacts, the average mortgage product fee has jumped by £150 over the past year. That's 17% over the past year, from around £890 to £1,030. 

Yes, you read that correctly: £1,030 is the average fee you'll now have to pay when you take out a new mortgage. And when you consider the other costs associated with buying a property or remortgaging, shelling out that £1,000 fee can be painful.

But by doing so, you may be able to snag a lower rate than you would if, say, you opted for a fee-free deal instead (yes, they do exist!).

The question is: What's the best option for you? Which strategy will end up costing you more in the long run?

I'm going to compare some of the best fee-free and fee-charging deals to see how they compare over the initial term.*

Two-year fixed rates

First up is the mortgage which has traditionally been the favourite mortgage of UK borrowers: the two-year fixed rate.

The best rate that borrowers with a deposit of 25% can get is 2.49%, from The Mortgage Works. However, the fee is pretty significant, at 1.5% of the advance, plus a £99 booking fee on top. By contrast, the best fee-free mortgage comes from Barnsley Building Society, at 2.79%.

 

The Mortgage Works (2.49%)

Barnsley BS (2.79%)

Monthly repayment

£677

£701

Total mortgage repayments over fixed period

£16,264

£16,840

Total outlay (including fee)

£18,613

£16,840

As you can see, in terms of monthly payments, you’ll end up shelling out almost an extra £600 (£24 a month) with the higher-rate deal from Barnsley Building Society over the course of your two-year fixed rate.

But you'll pay £2,349 less upfront than you’ll have to pay with the 2.49% deal from The Mortgage Works. So overall, you'll be £1,773 better off if you opt for the fee-free Barnsley deal, even though the rate is higher at 2.79%.

Five-year fixed rate

Personally, I much prefer the idea of fixing for the longer term at the moment, with rates at such historic lows. The lowest rate you can get with a deposit of 40% comes from Chelsea Building Society, with a rate of 3.39%. However, it carries a fee of £1,495.

Its best fee-free rival is the deal from Furness Building Society, with a rate of 3.75%.

 

Chelsea BS (3.39%)

Furness BS (3.75%)

Monthly repayment

£749

£779

Total mortgage repayments over fixed period

£44,963

£46,748

Total outlay (including fee)

£46,458

£46,748

This time, even though there is a significant fee of £1,495 to take into account, it works out cheaper over the initial term to go with the lower-rate deal from Chelsea Building Society, rather than the fee-free mortgage from Furness Building Society. But only by £290!

Two-year variable

Finally, let’s see how fee-free and fee-charging deals compare on a two-year tracker rate.

The lowest rate available for borrowers with a 30% deposit again comes from Chelsea Building Society, with a rate of just 1.99% (tracking the base rate plus 1.49%) and a fee of £1,495. Its best fee-free rival comes from Barnsley Building Society, with a rate of 2.54% (tracking base rate + 2.04%).

For the sake of ease, we’ll assume that base rate doesn’t move for the next two years.

 

Chelsea BS (1.99%)

Barnsley BS (2.54%)

Monthly repayment

£639

£681

Total mortgage repayments over initial period

£15,348

£16,357

Total outlay (including fee)

£16,843

£16,357

So this time, the fee-free option from Barnsley Building Society comes out as the best value, despite the fact that its rate is more than half a percentage point higher than the Chelsea deal.

Clearly, you’ll need to sit down and work out the costs you’re looking at with the various mortgages on your shortlist. There may be a middle ground, a mortgage which charges a fee, but a far more modest one than the market-leading rates, which works out best of all.

And you’ll also need to work out whether you can afford to pay the fee upfront, as if you add it to your mortgage balance, you’ll end up shelling out far more as you’ll have to pay interest on that fee!

15 terrific fee-free deals

Lender

Term

Interest rate

Maximum loan-to-value

Barnsley BS

Two-year fixed rate

2.79%

75%

ING Direct

Two-year fixed rate

3.55%

80%

Barnsley BS

Two-year fixed rate

3.69%

85%

Accord Mortgages

Three-year fixed rate

3.39%

75%

ING Direct

Three-year fixed rate

3.99%

80%

Yorkshire BS

Three-year fixed rate

4.14%

85%

Furness BS

Five-year fixed rate

3.75%

60%

Barnsley BS

Five-year fixed rate

3.89%

75%

ING Direct

Five-year fixed rate

4.44%

80%

Barnsley BS

Two-year tracker

2.54% (base rate + 2.04%)

75%

Santander

Two-year tracker

2.99% (base rate _+ 2.49%)

70%

Barnsley BS

Two-year tracker

3.34% (base rate + 2.84%)

85%

Woolwich

Lifetime tracker

2.89% (base rate + 2.39%)

70%

HSBC

Lifetime tracker

2.99% (base rate + 2.49%)

80%

HSBC

Lifetime tracker

4.69% (base rate + 4.19%)

90%

*My calculations assume you want to borrow a £150,000 mortgage over a 25 year term.

More: 100% mortgages are back! | The forgotten costs of an offset mortgage

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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