Mortgage fees: homeowners spend up to £20,000 chasing cheap rates

Hefty mortgage arrangement fees can add thousands of pounds to the cost of paying off your home, analysis by loveMONEY has found.

Homeowners could spend as much as £20,000 chasing cheap mortgage rates over their lifetime, research reveals.

For many years, lenders have been bulking up profits by offering mortgages with a low rate but then charging borrowers a massive ‘arrangement fee’ when they apply.

And while our research doesn’t suggest that chasing the lowest mortgage and remortgage rates is always a bad idea, it does highlight the importance of comparing the total cost of a deal before signing up.

This is especially true if you only need to borrow a small sum or live in an area where house prices are lower, as the fees will obviously equate to a greater percentage of your overall costs.

How the costs add up

According to the Financial Conduct Authority (FCA), the typical mortgage term now stands at around 30 years, an increase from the traditional 25-year mortgage.

Research last year by the FCA found that over 40% of first-time buyers select terms of 30-35 years in an attempt to cut monthly repayments and cope with the cost-of-living crisis. 

Some lenders are now offering mortgages over a 40-year term. 

This means some young first-time buyers may end up remortgaging as many as 20 times during their lifetime, versus previous generations who remortgaged between six to 12 times.

Mortgage advisors at Which? have said that most homeowners can expect to fork out around £1,000 on arrangement fees alone for their remortgage, and in some cases as much as £500 more for legal and exit fees.

Paying fees of around £1,000 each time means that over the 30-year mortgage term, these fees could total as much as £20,000 in extreme cases. 

That's an extra £20,000 on top of your existing mortgage and interest payments - and this is before factoring in the additional interest on these fees over time (assuming you add the fees to your debt).

Read our complete guide to mortgages

Fees vs rate

So does this mean you should never go for the cheapest deals on the market? Not necessarily, says Ray Boulger, senior mortgage technical manager at independent mortgage advisors John Charcol.

"The basic rule is that the smaller the mortgage and the shorter the term of the initial deal, the bigger the impact the various costs have on overall value,” he says.

“Therefore, based purely on rate and fee, those with a small mortgage are likely to be better off choosing a longer term deal.”

However, Boulger adds that, because there are always other factors to consider, “it is not that simple”.

"Although two-year fixed rates are a little lower than 5-year fixed rates, the extra fees payable on a series of 2-year fixes will often more than wipe out the saving, and whether interest rates will be higher or lower in 2 years' time is a gamble,” he says. 

“However, because most fixed-rate mortgages have an early repayment charge (ERC) within the fixed rate term, anyone planning to move home should normally avoid locking into a mortgage with too long an ERC; in theory, fixed rates can be ported, i.e. transferred, to a new home, but there is no guarantee the lender will allow this.

"Locking in to a longer term rate, and hence avoiding the need to remortgage every two years, also avoids the risk that a change in personal circumstances or lenders’ criteria makes it impossible to remortgage, although a product transfer, i.e. a new deal with the same lender, can normally be arranged even if there had been a change in personal circumstances.”