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The spring months are typically the busiest of the year in the housing market as buyers mobilise and sunshine adds to a property’s kerb appeal.
However, today’s buyers – and those remortgaging – need deeper pockets than a few years ago. Not only does the average mortgage rate start with a “5” but borrowers face hefty arrangement fees to secure the best deals. These are the fees paid to lenders purely to secure a certain rate, and come on top of any conveyancing or broker fees.
Over the past five years the average product fee on a fixed-rate mortgage has risen by £81 to £1,121, according to the data firm Moneyfacts. At the same time, the proportion of deals available without a fee has fallen from 41% to 36%. There are also fewer deals offering sweeteners such as cashback.
The highest fee Guardian Money found was £3,995 for products offered by Bespoke Bank of Ireland, although the lender specialises in “complex” cases. However, big high street lenders such as Santander, Halifax and Barclays all have deals with a hefty £1,999 price tag attached.
The Moneyfacts finance expert Rachel Springall says borrowers who locked into a cheap fix back in 2020 and are hoping to refinance will find “mortgage fees have been on the rise. Outside headline-grabbing low rates, borrowers need to check the overall cost of any mortgage, which includes any fees or cost-saving incentives.”
On top of the product fee, there could also be a valuation and legal costs to consider, especially if you are buying a home rather than remortgaging.
With nearly 7,000 residential mortgages on the market there are lots of products to choose from but “many have higher product fees”, says Chris Sykes, the technical director at the mortgage broker Private Finance.
“What lenders tend to do is offer a few tiers of product – perhaps there is a 4.25% with a £1,495 product fee, then a 4.5% with a £999 product fee, and a 4.75% with no product fee,” he says.
“Whether it is worth paying this product fee or not is just down to the maths of it, what the loan amount is and how the interest saving would offset that product fee. Product fees can often be added to the loan amount but then the interest payable on those added fees needs to be considered, too.”
To illustrate the point, Sykes costed one lender’s range based on 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). For five years it is 4.24% (£1,495 fee), 4.29% (£995 fee) and 4.46% (no fee).
The two-year deal at 4.33% has monthly repayments of £2,459 and total payments of £60,488. At 4.38%, monthly payments rise to £2,471 but the total repaid comes down slightly to £60,292. At 4.54%, the monthly repayments rise again to £2,512 but the overall paid falls to £60,275.
“Some people could be attracted to the lower rates but then actually it would be better for them to pay slightly more monthly and save themselves the fee,” he says.
On the same loan over five years, monthly and overall it works out cheaper to pay a big fee. At 4.24%, you pay £2,436 a month and £147,614 in total. At 4.29%, it moves up to £2,448 a month and £147,870 overall. For the 4.46% no-fee deal, it is £2,491 a month but the total repaid is much higher overall at £149,463.
In a market where the average UK home costs about £270,000 – and nearly £530,000 in London – the best deal ultimately will depend on your individual circumstances.
“There is often a trade-off between rate and fee,” says Mark Harris, the chief executive of the mortgage broker SPF Private Clients. He gives the example of two Nationwide five-year deals available to borrowers with a 60% loan-to-value: 4.02% with a £1,499 fee and a no-fee deal at 4.20%. “Essentially, if you borrow more than £250,000, you are financially better off taking the lower rate/higher fee combination,” he says. “For a smaller loan, the higher rate with a lower fee is a better deal.”
It is estimated that, on average, 800,000 homeowners with a fixed-rate deal with a rate of 3% or below will see their deals end this year. This means many homeowners have not yet been exposed to higher borrowing costs. At the time of writing, the average two-year fix is at 5.33%, while a five-year deal is 5.18%, according to Moneyfacts. The average two-year tracker rate is 5.20%.
Sykes gives the example of a client who bought their first home nearly five years ago with a £480,000 loan on a 25-year term. Their five-year deal at 1.39% meant monthly payments of £1,895.
“We are assessing options for them to remortgage on to now, they have a current balance of about £397,000 and a remaining term of 20 years,” he says. “But with rates now we are looking more like 4.2% on a new five-year product and payments up to about £2,449, so an increase of £554 per month.”
“Fortunately for these clients the property has increased in value over this time, and they’ve both had promotions at work, so can cover this substantial increase, but things will definitely be tighter for them,” he says. “They considered extending the mortgage term to help lower payments but decided against this.”
David Hollingworth, an associate director at the broker L&C Mortgages, suggests that lenders have introduced higher fee products to “try to squeeze the rate down a little further”.
He says: “Bigger fee deals are really a result of a very competitive market and lenders looking to do something different. A big fee could work for those with a bigger mortgage, where a lower rate will outweigh the fee. But many will be better to focus on keeping fees down, even if that means taking a slightly higher rate.”
