The ABCs of mortgage fees
Kate O’Raghallaigh looks at mortgage fees and likely costs of adding them to your homeloan
Getting a mortgage is likely to cost you more now than it would have done a year ago, as many lenders have increased their interest rates due to difficulty in obtaining funding – and that’s before you deal with the cost of the associated fees.
There are various fees associated with getting a mortgage – arrangement fees, legal fees, the cost of valuing the property, and in some cases, a Higher Lending Charge, which some lenders apply if you borrow a certain proportion of a property’s value, typically 75%.
Those lenders that charge an arrangement fee – and a lot of lenders do – typically require between £499 and £1,499, with many asking for a percentage of the mortgage value, usually between 2 and 3.5%. The average arrangement fee is currently £987, according to comparison site Moneyfacts. Even if you manage to secure a ‘fee free’ deal, you could be charged a slightly higher interest rate as a result.
Adding up
It is often possible to add the arrangement fee onto your mortgage and therefore have it incorporated into your monthly repayments, rather than paying it all at once when you take out a mortgage. However it is worth bearing in mind that even if this doesn’t make a noteworthy difference to your repayments, it will cost you more in the long run as a bigger mortgage amount will result in more interest to pay.
If you add on the average arrangement fee of £987 to a 25-year mortgage with a rate of 7% APR, for example, it could increase by 112% to £2,094, if paid back over the full term, according to price comparison site uSwitch. Furthermore, if you choose a mortgage with the maximum fee of £4,094, over 25 years at 7% APR this could inflate to £8,682 – adding almost £30 to your monthly mortgage repayments.
Some lenders have recently increased their arrangement fees, which, combined with a widespread reduction in loan-to-values (LTVs), has posed an even bigger challenge for first-time buyers in the current market. Zoe Stevens, spokesperson for Nationwide, says the increase made to the arrangement fee on the building society’s fixed-rate mortgage was implemented in order to keep a reign on new business. “We only increased the fee on one product, which was announced on the morning before the last Base Rate cut,” she explains. “This increase – and any made to the rates on our fixed-rate mortgages – were made to allow us to continue maintaining control of the volume of business we are currently attracting.”
A high arrangement fee is likely to come with a lower interest rate, says Katie Tucker, technical manager at brokerage John Charcol. She says: “We rarely see a large fee that isn’t justified by a lower interest rate. The only problem with arrangement fees is when they are added onto 95% mortgages, in which case, if they are combined with a HLC, you will probably have very little deposit left, and thus less equity in the property.”
Be aware
According to uSwitch, nearly eight million people have added arrangement fees onto their mortgage instead of paying upfront, with as many as 11% admitting to not even realising they had done so. Ann Robinson, spokesperson for uSwitch.com, says borrowers need to be aware that there are benefits and disadvantages to how you choose to pay the fees: “This is a real catch-22 for consumers who are struggling to find the funds to pay mortgage set-up costs,” she says.
“In fact, by allowing consumers to add fees onto the mortgage, it could be argued that providers are doing them a good turn. This is particularly true for first-time buyers where it could mean the difference between getting on the property ladder or not.”
“However, adding fees to a mortgage means that you will be spreading the amount over many years and paying interest for the pleasure of doing so - this is an extremely expensive option and should always be seen as a last resort.”
Zoe Stevens, spokesperson for Nationwide, agrees that those with modest savings should consider adding fees onto their mortgage where possible. She explains: “Adding fees to a mortgage can be good option for borrowers who don’t have the cash or savings available to pay the reservation fee. Some lenders also offer fee-free options - for example Nationwide offers a fee free two-year fixed-rate mortgage.
She does, however, warn borrowers to consider the long-term cost. “When deciding which mortgage to take borrowers should look at the total amount payable over the life of the deal, rather than just rate or fee, as this will show them the best option,” she continues. A Key Facts Illustration Document (KFI) – a document that should be given to you for every deal you are interested in and used for comparison purposes – will tell you the overall cost of the loan, which you should take into account when making a decision about which mortgage you choose.
Equity matters
And if you do decide to add on the fees to your mortgage, it’s a good idea make overpayments where possible, says Tucker. “Overpayments are a really good idea as they allow you to build up as much equity as possible, which you might need in the future when you come to remortgage.”
Although your monthly repayments may not necessarily be significantly higher with the added fees, it could affect your ability to remortgage later on, says Louise Cuming, head of mortgages at price comparison site Moneysupermarket. “The additional amount of interest you take on when adding fees to a mortgage can affect the amount of equity you build up in the property,” she explains.
“For example, if you borrow £150,000 at 95% LTV and are charged a 2% fee, you are in fact, borrowing 97% of the property’s value. Even if you have saved up a 5% deposit, 2% of that immediately disappears by putting the percentage fee onto the loan.
“If house prices continue to slow, this could affect you when you come to remortgaging in a couple of years. You may not be able to get another 95% deal, so adding on fees in this kind of market could actually be quite dangerous.”
When it comes to getting a mortgage, you should leave no stone unturned. If you are faced with an arrangement fee, regardless of size, make sure you are aware of the impact it will have on your monthly repayments. If you can’t make your payments comfortably, it might be a good idea to save a bit more before you commit yourself to a deal.
