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Mortgage Advisor & Director
What is a "no-fee" mortgage?
A “no-fee” mortgage is a mortgage that does not incur any arrangement fees, also known as completion fees. Arrangement fees are a kind of admin or processing fee that the lender charges the buyer to cover their administrative costs in processing the mortgage application.
Naturally, the lender can also cover their administrative costs as part of the profit they make when charging interest on a mortgage. Some lenders will offer so-called “no-fee” mortgages, and make up the loss of income from a fee by charging higher rates of interest for the loan itself.
Is it normal to pay fees on a mortgage?
A recent report found that 40% of high-street mortgages are now advertised as “no fees”, a percentage that is increasing year on year.
When buying a new property, you incur many costs beyond the cost of the property itself - solicitor’s fees, moving costs, renovations and furniture, as well as stamp duty. Avoiding arrangement fees, which can easily cost between £1,000 and £1,700, can appear to be a good strategy to free up your funds. However, looking at the longer term, no-fee mortgages can work out more expensive in the long run. It’s up to the buyer to do their sums and understand whether they’ll be better or worse off long term, and whether overall costs are more important than immediate costs.
It’s worth noting that many lenders who charge an arrangement fee will add on that fee on to the amount borrowed, without affecting your interest rates. For example, if you are purchasing a £200,000 property with a £20,000 deposit, you would normally require a loan of £180,000. If the arrangement fee was £1,500, the bank may simply offer you a mortgage for £181,500. This would work out more expensive in the long run, as you would then incur the same level of interest on the arrangement fee as you would on the total amount borrowed. However, by deciding to choose a mortgage with an arrangement fee, you would likely be able to take advantage of some of the lower interest rates on the market.
How do I calculate long term costs?
A broker will be able to advise you on the fees and interest rates associated with mortgages that are right for you. This will depend on the size of your deposit, the loan-to-value rate, and how long you want to lock in a fixed-rate for. Once you know what your options are, you’ll be able to use a mortgage calculator to look at the full costs.
For example, let’s say you are a first time buyer looking at a property worth £200,000. You have a 15% deposit of £30,000 and you want to borrow £170,000.
With a fee-free mortgage, you could be offered an interest rate of 2.19%. Over a 25 year period, you would pay back a total of £220,914, with monthly payments of £736.
Alternatively, you might choose to pay a fee of £999 up front, and take advantage of lower mortgage rates of 1.89%. In this case you would pay back a total of £213,445 with monthly repayments of £711.
On the other hand, you might choose the lower interest rates, but roll the fee up into the amount borrowed. In this case you would pay back a total of £214,699 with very slightly higher monthly payments of £716. Although an additional £5 a month might not seem much, over the lifetime of the mortgage it would cost you an additional £1,254. However, it is still less than the lifetime cost of the no fee option.
| Fee Free | Fee paid up front | Fee rolled into mortgage | |
|---|---|---|---|
| Fee | £0 | £999 | £999 |
| Interest rates | 2.19% | 1.89% | 1.89% |
| Total cost | £220,914 | £213,445 | £214,699 |
| Monthly repayments | £736 | £711 | £716 |
The length of mortgage, the amount borrowed and the interest rates will affect your options hugely. In the example above, paying a fee up front works out nearly £7,500 cheaper than choosing a no fee option. However, if you were to borrow less, or over a shorter period, this might not be the case.
As a rule of thumb, for a large mortgage, an arrangement fee won’t have much impact. For a smaller mortgage, an arrangement fee will have a bigger impact and you may wish to avoid it if you can.
Are no-fee mortgages free of all fees?
No. When a mortgage is referred to as “no fee”, it’s only referring to the arrangement fee. You may still have to pay the lender a valuation fee. If you were to try to pay off your mortgage early, you would likely incur early repayment charges. And if you were to miss a payment, you may incur late payment fees. There’s lots of costs to consider beyond the value of the loan itself, which is why lenders run such stringent affordability checks.
What if I pay the fee up front, but then my application is denied?
You would usually be refunded the arrangement fee. However, you may have also paid a smaller fee called a “booking fee” or “application fee”. This may not be refunded if you are denied. If the lender has already carried out their valuation on the property, it’s unlikely you’ll be refunded this fee, either.
Choosing an Adviser
Selecting a qualified and experienced mortgage adviser is of great importance. To choose a suitable adviser, evaluate their qualifications, experience, and reputation, and ensure they are regulated by the Financial Conduct Authority (FCA).
Read reviews from previous clients and make sure they provide a clear explanation of the products and services they offer, as well as the fees and charges associated with them.
