Mortgage companies, over the years, have charged varying fees for mortgages. Some lenders charge a mortgage indemnity guarantee which is an insurance policy covering the lender in the case of mortgage default. There are also valuation fees and arrangement fees. The latter is simply an administration fee for sorting the mortgage. Put together, these fees can run into a few thousand pounds and can vary depending on the mortgage being taken out. This mortgage fee landscape is changing, however, and fees for mortgages appear to be falling.
According to This is Money, arrangement fees are falling in the current UK mortgage market. These fees, depending on the mortgage can range from £300 to £1500 and the average in 2021 was £1,075 which, in 2022 has fallen to £1,057. One thing to note on this point is that typically there was a relatively large difference in interest rates for mortgages without a fee and ones with fees. Mortgages with no fees had a higher interest rate than ones without. The typical difference in interest rates no is only 0.03% compared to 0.21% in 2021 for fixed rate mortgages. This means that the saving in interest is unlikely to compensate for the arrangement fee. One final piece of the puzzle when it comes to these types of fees is that the number of mortgage products on the market without a fee is increasing. In 2021 35% of mortgage products attracted no arrangement fee, in 2022 this rose to 40% meaning a larger offering of fee free products.
So, the indications are there that mortgage fees are decreasing which, in this time of rising interest rates is good news for anyone wanting to take out a mortgage, but what is the best option when it comes to mortgages, is it worth paying the fee?
Should you opt to pay the fee?
This really depends on your personal circumstances. The first thing to look at is what the monthly payments are with and without the fee over the term of the mortgage. If for example, you take out a 5-year fixed mortgage and there is a £1,000 fee for the mortgage and you pay say £1,200 a month in mortgage payments. The fee free option means that you need to pay £1,250 per month. In this fee free case, you end up paying, over the 5 years £75,000 but with the mortgage with a fee you pay £72,000. In this case you pay £1,000 to save £3,000 which is a nett gain and could mean it makes more sense to pay the fee. Quite often fees can be added on to the mortgage which means you have no out-of-pocket expenses. This extra will, however, attract interest and end up costing more than the original fee. This is Money have a great mortgage calculator which will allow you compare the true cost of a mortgage and associated fees.
It is great news that mortgage fees are reducing and that there are many more fee free products out on the market, this is a welcome relief on the back of the rising interest rates.