As the UK mortgage market experiences a period of flux, borrowers must consider all costs beyond interest rates to avoid unexpected fees.
When it comes to securing a mortgage, many borrowers are focused on finding the best interest rate. However, there’s another cost that can add up quickly: arrangement fees.
Mortgage fees refer to charges imposed by lenders on borrowers for originating, processing, and servicing a mortgage loan.
These fees can include origination fees, appraisal fees, credit report fees, title insurance fees, and closing costs.
According to the Consumer Financial Protection Bureau (CFPB), mortgage fees can range from 2% to 5% of the total loan amount.
For example, on a $200,000 mortgage, fees could add up to $4,000 to $10,000.
According to Moneyfacts, the average product fee on a fixed-rate mortgage has risen by £81 to £1,121 over the past five years. This means that borrowers who lock into a cheap fix back in 2020 and are hoping to refinance will find that their mortgage fees have been on the rise.
The Cost of Convenience
Big high street lenders such as Santander, Halifax, and Barclays all have deals with a hefty £1,999 price tag attached. However, not all lenders charge this much. Bespoke Bank of Ireland, for example, has a deal with a fee of £3,995 – although the lender specializes in ‘complex‘ cases.
So why are lenders charging more for these fees? According to Chris Sykes, technical director at mortgage broker Private Finance, many lenders offer a few tiers of product. This means that borrowers may be tempted by lower rates, but end up paying higher fees. For example, a 4.25% deal with a £1,495 fee might seem like a good option – but when you factor in the cost of the fee itself, it could work out more expensive than taking a slightly higher rate.
The Math Doesn’t Lie
Sykes uses an example to illustrate his point: a £450,000 loan over 25 years, with a 75% loan-to-value. The two-year fix range is 4.33% (£1,495 fee), 4.38% (£995 fee) and 4.54% (no fee). When you factor in the cost of the fee itself, the no–fee deal actually ends up being more expensive than taking a slightly higher rate.
A Trade-Off Between Rate and Fee
Mark Harris, chief executive of mortgage broker SPF Private Clients, says that there’s often a trade-off between rate and fee. For borrowers with a larger loan-to-value, the lower rate might outweigh the higher fee. However, for those with a smaller loan, the higher rate with a lower fee is a better deal.
A Market in Flux
The mortgage market is currently experiencing a period of flux, with lenders introducing new products to try and squeeze the rate down further. David Hollingworth, associate director at broker L&C, suggests that bigger fee deals are really a result of a very competitive market.
Ultimately, borrowers need to consider all the costs when choosing a mortgage – not just the interest rate. By understanding the hidden cost of securing the best mortgage rate, you can make an informed decision and avoid getting caught out by unexpected fees.
A mortgage is a loan from a lender that allows homeowners to borrow money to purchase a property.
The borrower makes regular payments, known as mortgage payments, which typically include principal, interest, taxes, and insurance (PITI).
There are various types of mortgages, including fixed-rate and adjustable-rate loans, government-backed loans like FHA and VA loans, and jumbo loans for high-value properties.
Homeowners can also consider refinancing their existing mortgage to lower their interest rate or switch loan terms.
- theguardian.com | UK mortgages: warning over big fees as homebuying season arrives
