Mortgage deal arrangement fees can vary from a couple of hundred pounds up to thousands depending on what’s on offer, but fee-free deals are now on the rise.
According to Moneyfacts.co.uk, borrowers have greater access to fee-free deals than ever before, with 40% of the mortgage market scrapping arrangement fees in their bid to attract new customers. In July 2016, 1,270 (33%) of mortgages were fee-free, while today there are a prodigious 2,007 fee-free mortgages available to borrowers.
As the mortgage market continues to explore the best ways to appeal to new customers, the fee-free option means lenders can be competitive without having to reduce rates, while the possibility of a base rate rise still looms in the background.
The flip side to some lenders using fee-free incentives to acquire new customers is that other mortgage providers are offering lower-rate deals with fees, in their bid to compete. While at first glance these may appear more attractive, borrowers are encouraged to do the maths.
Increased fees mean lower rate mortgages may not be cheaper
According to Moneyfacts, the fees for mortgage deals have also increased; the average fee now stands at £990, a rise of £11 since May this year. A higher upfront cost could easily nullify the savings made by a lower-rate deal, especially if the fee is added to the mortgage amount. Borrowers are warned to be wary of focusing on the cheapest possible deal without investigating all the options available, as clarified by Charlotte Nelson, finance expert at Moneyfacts.co.uk.
“Borrowers opting for the lowest two-year fixed rate deal at 75% loan-to-value would be £1,131.80 worse off [based on a £200,000 mortgage over a 25-year term on a capital and interest repayment basis] compared to someone opting for the lowest deal without a fee.”
The advice to borrowers is to thoroughly research all the options available. At face value, a fee-free deal on a higher interest rate may not appear cheaper, but it might be the better choice long-term. Certainly for borrowers likely to remortgage several times over their mortgage term adding the fees to their mortgage each time, they would end up paying significantly more than if they had opted for a higher rate, but fee-free deal.