Are Big Mortgage Product Fees Worth It?
If you’re approaching the end of your mortgage fixed rate, you might find yourself being offered products with lower rates but BIG product fees. The monthly payments might be attractive, but are the big fees worth it?
The answer will depend on your loan size, mortgage term, size of the product fee and ultimately your individual circumstances. You should most certainly speak with a mortgage broker to understand the overall cost and the implications.
What is a product fee?
A product fee is a payment to your lender that covers the administration costs of arranging your mortgage to your lender. Product fees can be also known as an arrangement fee, booking fee or lender fee. This is usually quoted with the interest rate offered by the lender.
The majority of lenders offer two options for each of their mortgage products:
1) An option with no product fee but a higher rate
2) An option with a product fee (often £999) and a lower rate
Mortgage lenders will usually allow you to add the product fee to your mortgage or pay the fee upfront. Adding fees to your mortgage will result in the fee forming part of total amount owing and you paying it off over the term of the mortgage, with interest. So you have to think carefully as to whether it’s worthwhile.
Recently a lender came to market offering existing customers marketing leading interest rate but with a whopping 5% product fee! The higher fee brings down the monthly payment but whilst the mortgage rate may look attractive and payments lower you should most certainly seek advice as after 2 years you could be worse off.
Below is a worked example comparing three 2-year fixed rate mortgage deals – one with a 5% product fee, one with a £999 fee and another with no product fee. The example below is based on a £250,000 loan amount over 30 years on a property worth £350,000 (meaning 71% LTV)
|2 year fixed comparison||5% product fee||£999 product fee||No product fee|
|Initial Interest Rate||3.39%||5.36%||5.48%|
|Fixed Period||2 years||2 years||2 years|
|Balance after 2 years||£252,020||£243,866||£243,050|
As you can see above, taking a big product fee can save you hundreds of pounds each month, but the cost of this is owing more after 2 years than you started with, which may come as a shock.
This may seem like a bad idea but for borrowers struggling with the prospect of a big jump in montly payments, it might be the difference between making ends meet and falling into debt.
Its important you weigh up the overall cost of the product against your circumstances and priorities.
Undray Griffith – 13th October 2023