Mortgage interest rates are rising amid spiraling inflation, driving up monthly costs for many new homebuyers, those remortgages and variable rate customers.
But while the expenses will be greater overall, a new study suggests that mortgage customers are now less likely to pay arrangement fees — and if they do, it’s likely to be lower.
The average fee currently charged for a fixed-rate mortgage deal is £1,057 – a decrease of £18 per annum, according to financial comparison site Moneyfacts.
Variation: While mortgage rates go up, the arrangement fees charged go down
In addition, the proportion of fixed-rate mortgages that do not charge a fee increased from 35 percent in June 2021 to 40 percent at the beginning of June 2022.
This is Money answers some of the most frequently asked questions about mortgage arrangement fees, and finds out why the recent downfall.
What are the mortgage settlement fees?
An arrangement fee—also known as a product fee—is a fee banks and building societies charge up front when they grant a customer a new mortgage, though it can often be added to the loan.
They range from just under £300 to over £1,500.
Not all mortgages have an arrangement fee, but “no-fee” mortgages usually have higher interest rates than those that charge a fee.
But that gap appears to be narrowing. The price gap between average fixed prices with and without product fees is currently 0.03 percent, according to Moneyfacts, compared to 0.21 percent a year ago.
Do the amounts: Paying fees when you don’t need to may seem counterintuitive – but borrowers should crunch the numbers, because doing so could mean lower mortgage costs overall.
‘Mortgage rates may be on the rise, but it’s not all bad news for borrowers as they can still find an abundance of options to help them save on the upfront cost of their deal,’ says Rachel Springol, financial expert at Moneyfacts.
In practice, mortgage fees are used to cover the lender’s administrative costs, such as marketing and underwriting mortgages – but those who pay them and those who don’t see no change in the way they submit their mortgage application.
There is no real difference between a mortgage with an arrangement fee and one without.
Should I take out a fee-based mortgage?
It depends on several things, including the size of your mortgage; the exact price gap between a fee-charging mortgage and similar fee-free mortgages you might be applying for; whether you have money to spare; and how quickly fees are paid.
Simply put, an arrangement fee often allows the client to get a cheaper rate on their deal, says Nicholas Mendez, technical director of mortgage at Realtor John Charcole.
The lender will charge a fee at the start of the mortgage for the product, and this will be reflected in the price and thus the monthly payments.
A five-year fixed rate would normally have attached a fee of £995 across most lenders, and over five years the reduced monthly payments rate would be a saving against a no-fee mortgage, covering £995 and more, making for an all-around saving.
However, this isn’t always the case – especially for borrowers who can’t afford to pay fees upfront.
If you choose to add the fee to the total loan amount, interest will be charged on it—which can wipe out the savings.
Hina Bhudia, partner at Knight Frank Finance, says, ‘When you add fees to a mortgage, it’s spread out over the cost of the loan term, so it ends up costing you more in the long run.
If you are in a position to pay it in advance, we always advise you to do so.
Customers who are unable to pay the fee upfront can add it to the mortgage and once the loan is issued, provided they have agreed to the overpayment option, they can choose to clear it when it suits them.
In addition, it is also common for banks to allow up to two weeks for fees to be cleared without affecting the allowance for overpayments.
When taking out a mortgage, borrowers are often advised to consider any fees when calculating their monthly payments – allowing them to see the ‘true’ cost of the mortgage, as a no-fee premium mortgage may be cheaper than a mortgage. The price is bafflingly cheap, but the arrangement cost is exorbitant.
You can compare different mortgages and weigh the cost of rates and fees using the Mortgage Calculator from This is Money.
Calculating the cost: For those who typically remortgage every two years, paying the arrangement fee each time can start to add up.
It’s also a good idea to consider how often you can refinance. If you normally prefer two-year repairs, paying £1,000 every two years starts to feel like a lot of money.
And the arrangement fee doesn’t change depending on the size of the mortgage, so for someone paying off a smaller loan, the fee will make up more of their total payment.
“Paying fees each time you remortgage can add up, especially if the mortgage loan size is low,” says Adrian Anderson of Anderson Harris mortgage specialist.
Why are fees dropping?
The drop in mortgage charges has occurred alongside the recent rise in mortgage rates, which has been caused by several consecutive increases in the Bank of England’s base rate as it tries to combat soaring inflation.
Over the past 12 months, the highest average arrangement fee Moneyfacts recorded was in September 2021 at £1,090), around that time there were several lenders offering fixed mortgages at record low rates of less than 1 per cent.
This figure was just £16 shy of the all-time record for average mortgage fee, set in August 2012 which stood at £1,106.
Draw: As rates go up, some lenders are using lower fees to help them attract customers
With mortgage rates rising, some experts say banks and building societies are offering lower fees as carrots to try to lure customers ahead of their competitors.
“I suspect that given the trend in mortgage rates, lenders have tried to reduce some of the fees on their products, where they can,” says Rosie Fish, mortgage expert at online mortgage company Habito.
With interest rates rising this year, lenders also wanted to better position their mortgage deals on online comparison tables. Low-fee deals will show up better in search results when someone filters out “total cost.”
What happens if the mortgage does not pass?
Right now, some borrowers who come in to refinance seek to secure their new deal a few months ahead of time, hoping to protect themselves from further hikes.
Most remortgages can be agreed upon three or six months before the completion date, so this is something worth considering.
But some may be worried about paying the arrangement fee, and then decide later that they won’t go ahead with that particular mortgage – for example if rates start to fall, instead of rising.
Those in this situation should check the lender’s terms and conditions carefully, but in general it is usually possible to get a refund.
“Most lenders will return the product fee if you don’t go ahead,” Anderson says. When applying for a mortgage, check that out — and if you’re worried you can consider adding the fee to the mortgage when you apply.
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