Mortgage arrangement fees fall and fee-free deals increase

Mortgage arrangement fees fall and fee-free deals increase

By Nicky Burridge

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Good news for homeowners as mortgage lenders lower their fees, while 40% of deals no longer charge a fee at all.

The number of fee-free mortgage deals available has jumped by 34% in the past year, among intense competition between lenders.

Four out of 10 fixed rate mortgage products currently don't charge any arrangement fees at all, according to financial information group Moneyfacts.

And there's further good news for borrowers.

The cost of deals that do charge a fee has fallen. The average product fee is now £1,057, down from a recent high of £1,075 in September 2021.

The gap between the interest rate charged on fee-free fixed rate deals and those that include a fee has also narrowed. It's now just 0.03%.

Those who pay a fee are charged an average 3.68% in interest, whereas those who don't pay an average of 3.71%.

Mortgage expert Dan Knott, of Active Mortgages, said: “Lower rates usually disguise high fees, but with the rates increasing across the board, taking away those fees helps lenders to make their mortgage products more competitive.”

Mortgage advisor Daniel Knott

Is it worth paying a fee?

When weighing up whether or not to pay a fee in order to secure a lower rate, Knott says it's important to look at the total cost of the deal, taking into account any other fees or incentives.

As a general rule, those with larger mortgages are generally better off paying a fee in order to secure a lower interest rate.

For example, if you have a £350,000 mortgage, paying a fee of £1,000 to secure a rate of 2%, rather than 2.5%, would save you £1,149 over the course of the product for a two-year deal.

But if your mortgage is only £100,000, paying the fee for the lower interest rate would actually work out £389 more expensive.

With the difference in the interest rates between fee-free deals and those that charge a fee much narrower than in the example above, the advantages of paying a fee are likely to be smaller.

Knott says: “You need to consider how much is that mortgage truly going to cost you over the course of that product term. The value of getting expert advice is that we will identify the true cost of a mortgage product.”

How much can I borrow for a mortgage?

What other deals are available?

In the past year, there has also been an increase in the number of mortgage products offering free or refunded legal fees and valuations.

Just over half of all mortgage products currently offer free legal fees, while 72% come with free valuations.

At the same time, there are 1,350 mortgages that offer cashback to borrowers upon completion.

What types of mortgages are there?

Should I consider one of these deals?

Knott suggests that the best mortgage is usually the one that works out cheapest over the product term, when all fees and charges have been taken into account.

But he adds that cashback deals are often popular with first-time buyers as they know they will receive a lump sum on completion, which they can put towards moving costs or furnishing their new home.

"Sometimes people opt to pay a fee to secure a cheaper deal but have the fee added to the amount they owe," says Knott.

"While this means they will pay more in interest in the long-term, it can be a useful way of avoiding up-front costs."

But he points out that this will not always be an option.

For example, it's not usually possible to add mortgage arrangement fees to the outstanding mortgage for 95% loans.

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