Mortgage borrowers are paying higher arrangement fees than they were five years ago while cashback sweeteners have declined, new analysis has revealed.
On top of coping with higher interest rates, borrowers face an average fee of £1,129 on fixed rate mortgages, according to rates monitor Moneyfacts.
It means the typical fee has risen by £89 since March 2020.
Lenders may add on arrangement fees (also known as product fees) for setting up a mortgage. They typically range from nothing at all to £2,000.
But as well as covering the lenders’ costs, they essentially act as a ‘top-up’ profit for the lender on mortgages with lower rates.
Not all mortgages come with fees attached. Sometimes the same lender will offer two mortgages with similar terms, one with a fee and one without. The one with a fee will have a lower interest rate.
Counting the cost: Borrowers face higher monthly mortgage repayments and also higher fees than they did five years ago, according to Moneyfacts
Recently, major lenders have grabbed headlines by offering some of the lowest rates on the market – but these have usually been accompanied by hefty fees meaning they may not be the cheapest deal overall.
This is especially true if the fee is rolled into the mortgage balance, because it will accumulate interest.
Santander, for example, was recently offering the lowest two-year fix on the market at 3.99 per cent, but it came with a £1,999 fee.
Rachel Springall, finance expert at Moneyfacts said: ‘Borrowers who locked into a cheap fixed rate in 2020 and are looking to refinance will find mortgage fees have been on the rise.
‘Borrowers need to check the overall cost of any mortgage, which includes any fees or cost-saving incentives.
‘The best deal also depends on someone’s circumstances and how much they need to borrow.
‘Someone with a larger debt would typically chase a lower rate, whereas those looking to avoid upfront costs would consider fee-free deals and incentives.’
This is Money’s True Cost Mortgage Calculator can help borrowers compare how different mortgages stack up, taking into account fees and interest.
The true cost of mortgage fees
While the lowest rate can sometimes be the cheapest option for borrowers, products with a higher rate and no fee often offer a better deal.
For example, a lender might offer a 4.5 per cent rate with no fee and a 4.25 per cent rate with a fee.
On a £200,000 mortgage with a 25 year repayment term, the difference between a 4.5 and 4.25 per cent rate in monthly costs would be £1,111 and £1,083 a month. Over a two-year period that would equate to a £672 saving on the lower rate.
But add a £999 fee to the 4.25 per cent rate and it is no longer the cheapest option overall, costing a total of £27,002 compared to £26,680 on the higher rate.
Mortgage expert: Chris Sykes, technical director at mortgage broker Private Finance
Over a five-year period the product with the lower rate and £999 fee still works out cheapest, costing £66,008 rather than £66,700, as the borrower is benefitting from the lower interest rate for a longer period of time.
Chris Sykes, technical director at mortgage broker Private Finance says: ‘Product fees have been getting bigger, although the classic fee structure of a £999 fee option and a no-fee option is still offered by most lenders.
‘Lenders do this to ensure they are gaining a margin, but they are also making sure they are attracting certain types of business.
‘These large fee products often only make sense for people taking out larger mortgage amounts.’
Aaron Strutt of mortgage broker Trinity Financial added: ‘Borrowers need to do their sums to work out if paying the higher fees makes sense.
‘That said, many people want the cheapest possible rate to minimise their monthly repayments.’
If the fee is paid at the outset of the mortgage, rather than being rolled in to the loan, it is more likely to work out cheaper overall.
What other fees do mortgage lenders charge?
On top of arrangement fees, there could also be a valuation fee and some legal fees to take into account – especially if you are buying a home rather than remortgaging.
The mortgage valuation is to assess that the property is something that fits within the lender’s lending criteria, and that the amount being paid represents market value.
A mortgage valuation fee can vary depending on the value of the property. It will typically cost between £100 and £500, but in many cases it will be offered for free as part of the mortgage deal.
If a valuation fee is included, you will need to pay this upfront. This is different from the arrangement fee, which can be added to the mortgage if requested.
Some basic legal work is also required to pay off the current mortgage, remove the original lender from the property title and replace it with the new lender if you are moving home.
However, in many instances the basic legal work will be included for free as part of the mortgage deal, or some cashback will be made available to cover costs.
The free service is very basic, so if any additional work is required, such as adding or removing a partner from the mortgage, then you may be required to pay extra.
The proportion of mortgage deals that offer a free or refunded valuation has risen to 73 per cent, from 72 per cent at the start of March 2020, according to Moneyfacts.
However, the proportion of fixed rate mortgage deals that offer free or refunded legal fees has fallen to 42 per cent, from 49 per cent at the start of March 2020.
Some lenders also offer cashback incentives; money paid to the borrower when the mortgage starts as a cash bonus.
But the proportion of the market offering cashback has dropped by 9 per cent since March 2020, according to Moneyfacts.
Rachel Springall said: ‘Deeper analysis of the availability of mortgage incentives shows a proportional decline in the quantity of deals that do not charge a product fee, down to 36 per cent from 41 per cent five years ago.
‘However, one incentive in continuous decline has been in the proportion of deals that pay cashback, as there are now less than a third of deals with this sweetener attached, across all fixed mortgages.
‘More often than not, borrowers can find a deal with a free or refunded valuation incentive, and just under half of all fixed deals will cover legal fees.
‘Those looking to remortgage will likely want to keep costs down and refinance without too much effort, so these mortgage bundles are a great choice to avoid the worries of covering upfront fees.
‘First-time buyers may also have exhausted all their disposable cash on a deposit, removal and furnishing costs, so a cashback deal with a bundle of incentives could be ideal.
‘Lenders could also add upfront fees to the mortgage advance, so it’s wise for borrowers to seek advice to navigate all the options available to them before they commit.’
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