Should You Go For A Mortgage Offer That Charges Origination Fees?

Mortgage interest rates are rising amid skyrocketing inflation, raising monthly costs for many new homebuyers, remortgaging and variable rate customers.

But while spending will be higher overall, new research suggests mortgage customers are now less likely to pay setup fees, and if they do, they are likely to be lower.

The average fee currently charged on a fixed-rate mortgage deal is £1,057, a drop of £18 a year, according to financial comparison website Moneyfacts.

Contrast: While Mortgage Rates Are Going Up, Arrangement Fees Charged Are Going Down

In addition, the proportion of fixed-rate mortgages that do not charge commission has increased from 35% in June 2021 to 40% at the beginning of June 2022.

This is Money answers some of the most common questions about mortgage settlement fees and finds out what’s behind the recent drop.

What are the costs of formalizing a mortgage?

Arrangement fees, also known as product fees, are up-front fees charged by banks and building societies when they give a customer a new mortgage, although they can often be added to the loan.

They range from just under £300 to over £1,500.

Not all mortgages have origination fees, but ‘no fee’ mortgages traditionally have higher interest rates than those that charge fees.

However, that gap appears to be narrowing. The rate gap between average fixed rates with and without a product fee is currently 0.03 percent, according to Moneyfacts, compared with 0.21 percent a year ago.

Do the sums: Paying a fee when you don't have to may seem counterintuitive, but borrowers should crunch the numbers, as doing so could mean their mortgage costs less overall.

Do the sums: Paying a fee when you don’t have to may seem counterintuitive, but borrowers should crunch the numbers, as doing so could mean their mortgage costs less overall.

Rachel Springall, Finance Expert at Moneyfacts, says: “Mortgage rates may be on the rise, but it’s not all bad news for borrowers, as they can still find plenty of options to help them save on the initial cost of their deal”.

In practical terms, mortgage fees are used to cover the lender’s administrative costs, such as marketing and underwriting the mortgages, but those who pay and those who don’t will see no change in the way your mortgage application is handled. mortgage.

There is no real difference between a mortgage with an origination fee and one without it.

Should I take out a mortgage that charges a fee?

It depends on several things, including the size of your mortgage; the exact rate gap between the fee mortgage and similar no fee mortgages you would otherwise apply for; if you have money to spare; and how quickly you could pay the fee.

Nicholas Mendes, technical manager of mortgages at broker John Charcol, says: ‘Simply put, settlement fees often allow a client to get a cheaper rate on their deal.

‘A lender will charge a fee at the beginning of the mortgage for the product, and this will be reflected in the rate and later in the monthly payments.

‘Typically a five year fixed rate will have a fee of £995 at most lenders, over the course of five years the reduced rate of monthly payments would be a savings against a no fee mortgage, covering the £995 and more, making an overall saving.’

However, this is not always the case, especially for borrowers who cannot pay the fee up front.

If you choose to add the fee to the total loan amount, you will be charged interest, which could wipe out your savings.

Hina Bhudia, Partner at Knight Frank Finance, says: ‘When you add a fee to the mortgage, it’s spread over the cost of the loan term, so it ends up costing you more in the long run.

‘If you are able to pay for it in advance, we always recommend that you do so.

‘Customers who are unable to pay the fee up front can add it to the mortgage and once the loan is issued, provided they have agreed to an option to overpay, they can choose to pay it off at their convenience.

‘In addition, it’s also common for banks to allow up to two weeks for the fee to settle without affecting your overpayment allowance.

When taking out a mortgage, borrowers are often advised to factor in fees when calculating their monthly payments, allowing them to see the “true” cost of the mortgage, as a higher rate mortgage with no fee can be cheaper than one with a tempting cheap rate, but a hefty setup fee.

You can compare different mortgages and weigh the cost against rates and fees using the This is Money Mortgage Calculator.

Counting the cost: For those who typically remortgage every two years, paying a setup fee each time can start to add up.

Counting the cost: For those who typically remortgage every two years, paying a setup fee each time can start to add up.

It’s also a good idea to think about how often you might re-mortgage. If you normally prefer two-year fixes, paying £1,000 every two years starts to sound like a lot of money.

And the setup fees don’t change based on the size of the mortgage, so for someone paying off a smaller loan, the fees will account for a larger portion of your total payments.

Adrian Anderson, of real estate finance specialist Anderson Harris, says, “Paying a fee every time you remortgage can add up, especially if your home loan amount is low.”

Why are the rates going down?

The drop in mortgage rates came alongside the recent rise in mortgage rates, which came about due to several successive increases in the Bank of England’s base rate in an attempt to fight rising inflation.

Over the last 12 months, the highest average origination fee recorded by Moneyfacts was in September 2021 at £1,090), at the time there were a number of lenders offering fixed-rate mortgages with record rates of less than 1 per cent.

That figure was just £16 less than the all-time record for the average mortgage rate, recorded in August 2012 and recorded at £1,106.

Giveaway – With rates on the rise, some lenders are using lower rates to help them attract customers

Giveaway – With rates on the rise, some lenders are using lower rates to help them attract customers

As mortgage rates rise, some experts say banks and building societies are offering lower rates like a carrot to try to lure customers ahead of their competitors.

“I suspect that given the direction mortgage rates are going, lenders have tried to lower some of the rates on their products, where they can,” says Rosie Fish, a mortgage expert with the online mortgage company, Habito.

‘As interest rates have risen this year, lenders will also want to improve the ranking of their mortgage deals in online comparison tables. Lower rate offers will show up better in search results when someone filters by “overall cost.”

What happens if the mortgage is not processed?

Right now, some borrowers approaching a new mortgage are looking to secure their new deal a few months early, hoping to protect themselves against further increases.

Most remortgages can be agreed to three or even six months before the completion date, so this is worth considering.

But some might be worried about paying the settlement fee and then decide they’re not going to move forward with that particular mortgage, for example, if rates started going down, instead of going up.

Those in this position should carefully check their lender’s terms and conditions, but it is generally possible to recover the fee.

Anderson says, “Most lenders will refund your product fee if you don’t go through with it. When you apply for a mortgage, check this and if you’re concerned, you might consider adding the fee to the mortgage when you apply.’

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