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If you're on the lookout for a new mortgage, either for a house purchase or in a bid to remortgage to a lower rate, you may be tempted to just pick the lowest rate on the market, but wait! Before you decide, remember to look at the mortgage fee attached to a deal, especially as the average fixed fee now stands at its highest point since August 2013.
In fact, our latest figures show that the current average fixed mortgage fee stands at £1,018, up from £986 recorded last July and outstripping its previous high point of £1,005 in August 2013, as can be seen in the table below.
|Average Fixed Mortgage Fee||£1,005||£886||£929||£986||£1,018|
And that's not all, as moneyfacts.co.uk finance expert Charlotte Nelson warns that: "Some of the lowest deals on the market have fees of around £2,000, and some borrowers are being asked for even more, with the largest fee on a fixed rate mortgage sitting just shy of £4,000 (on a deal for professionals only)."
Clearly, while rates remain at record lows especially in the fixed market, they are being compensated by larger arrangement fees. And given that these fees can differ even within a provider's offering, it can be difficult to know the real value of deals that come with a fee.
As with anything, there are advantages and disadvantages to picking a mortgage with a fee. For one, deals with larger fees often allow you to add the fee to the mortgage advance, which means you wouldn't have to pay more upfront. However, this does increase the amount you are borrowing, which in turn pushes up your monthly repayments and could negate the lower rate you are getting when compared to a fee-free deal.
That said, Charlotte points out that "a low rate with a high fee does tend to favour those borrowers purchasing properties at the higher end of the housing market, so the advantages of a fee-paying versus a fee-free product will depend on personal circumstances."
No matter what kind of property you're buying, you should always look beyond the headline-grabbing rate. "For example, opting for the lowest two-year fixed rate mortgage at 60% loan-to-value with no fee (currently Skipton Building Society's 1.48% deal) will see borrowers £1,088.61 better off in the first year [based on £150,000 mortgage over 25 years on a repayment-only basis] compared with the lowest overall rate, which comes with an above average fee of £1,495," says Charlotte.
All of this doesn't mean that you shouldn't try to switch to get a better deal. On the contrary, it simply means that you should seek out those deals that have the best overall package, taking both any fees and the mortgage rate into account.
Especially if you're opting for short-term fixed rates and therefore need to remortgage every two years or so, or revert to your lender's SVR, you'll want to avoid costly fees. Instead, consider using the money you save to overpay your mortgage, as this could help you become mortgage-free faster.
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