By Matthew Horan CeMAP · Mortgages
Quick answer: The interest rate isn't the only cost of a mortgage. You may also pay a product or arrangement fee, a valuation fee, legal fees, and a fee to close your old mortgage. If you leave a deal early, there can be an early repayment charge too. A mortgage with a lower rate but higher fees isn't always cheaper, so it's worth comparing the total cost over the length of the deal. Clarity Mortgages & Protection in Altrincham gives fee-free advice, with no obligation.
When people compare mortgages, they often focus on the headline interest rate. It's understandable, but it only tells part of the story. Fees can add hundreds or even thousands of pounds, and some are easy to overlook until late in the process.
Here's a plain-English guide to the main costs, when they apply and how to compare deals properly.
The main mortgage costs
Product or arrangement fee
Many lenders charge a fee for setting up the mortgage. It can be a fixed amount or a percentage of the loan, and it's often higher on deals with lower interest rates. Some deals have no fee at all, but may have a higher rate.
You can usually choose to pay it upfront or add it to the loan. Adding it to the loan spreads the cost, but you'll pay interest on it for as long as it's part of the mortgage, so it costs more over time.
Valuation fee
The lender arranges a valuation to check the property is worth enough to lend against. Some lenders include this free on certain deals, and others charge for it. The valuation is for the lender's benefit, and it isn't a full survey of the property's condition.
Survey
If you're buying, you may want a survey, which looks at the condition of the property in more detail. It's separate from the lender's valuation, and you choose the level that suits the property. It's worth considering, particularly for older homes.
Legal fees
When you buy a home, you pay a solicitor or conveyancer to handle the legal work. When you re-mortgage, some deals include free or reduced legal fees. Others don't, so you'd pay a solicitor for the work.
Mortgage exit or deeds release fee
Your current lender may charge a fee when you repay the mortgage, either because you're moving or switching. It's usually a modest amount, but it's worth knowing about in advance.
Early repayment charge (ERC)
If you leave a fixed or discounted deal before it ends, you'll often pay a charge, usually a percentage of what you owe. It can be one of the biggest costs of all, so check it before you decide to switch or move. Our post on porting your mortgage when you move explains how it can sometimes be avoided.
Other costs when buying
If you're buying a property, there may also be stamp duty, Land Registry fees and bank transfer charges. Stamp duty rules change, so check the current position on GOV.UK.
Broker fees
Some brokers charge a fee, either instead of or in addition to being paid by the lender. At Clarity we don't charge a fee for our advice, and we explain how we're paid at the start. For more on this, read Do you need a mortgage broker?
Why the lowest rate isn't always the cheapest deal
Imagine two deals. One has a lower interest rate but a high product fee. The other has a slightly higher rate but no fee. Which is cheaper depends on how much you borrow and how long the deal lasts.
On a larger loan, a lower rate can save more than the fee costs. On a smaller loan, the fee can outweigh the savings. That's why comparing the total cost over the deal period, including all fees, gives you a clearer picture than the rate alone.
Look out for incentives
Some deals offer extras that can offset costs, such as:
Free valuations
Free or reduced legal fees on a re-mortgage
Cashback
No product fee
These can make a deal better value, but only if the rest of it stacks up. An attractive incentive on a deal with a high rate may not be worth it.
Costs when you re-mortgage
If you're switching to a new lender, the likely costs are the product fee, the valuation and legal fees (unless included), any exit fee from your old lender and any early repayment charge. Timing matters, as leaving at the end of your deal can avoid the ERC. Read When should you re-mortgage? and Your fixed rate is ending to plan ahead.
Costs when you're buying
First-time buyers in particular can be caught out by the extra costs on top of the deposit. Our first-time buyer mortgage guide explains each step, and our post on how much you can borrow will help you plan your budget.
How to keep costs down
Compare the total cost, not just the rate. Include fees and incentives.
Think about whether to pay fees upfront. Adding them to the loan costs more in interest over time.
Plan around your deal's end date. Avoid early repayment charges where you can.
Ask about free valuations and legals. They can save you real money.
Get everything in writing. The lender must give you the key costs in your mortgage illustration before you commit.
Use a broker who explains every fee. You should know what you're paying, and who's being paid.
Frequently asked questions
What fees do I pay when taking out a mortgage?
Common costs include a product or arrangement fee, valuation fee, legal fees and sometimes an exit fee from your old lender. If you're buying, there may also be stamp duty and a survey.
Can I add the mortgage fee to the loan?
Often yes, but you'll pay interest on it, so it costs more over the life of the mortgage than paying upfront.
What is an early repayment charge?
It's a charge for leaving a fixed or discounted deal before it ends, usually a percentage of the amount you owe. Check your terms before you decide to switch or move.
Are there mortgages with no fees?
Yes. Some deals have no product fee, though they may have a higher interest rate. It's worth comparing the total cost.
Is a lower rate always better?
Not always. A lower rate with a high fee can cost more than a higher rate with no fee, depending on the loan size and the length of the deal.
Does it cost anything to speak to you?
No. We don't charge a fee for our advice.
If you'd like to see the total cost of your options, get in touch. It's fee-free with no obligation. We help clients across Altrincham, Trafford and Cheshire.
About the author
Matthew Horan CeMAP is Principal of Clarity Mortgages and Protection, an independent, fee-free mortgage and protection broker based in Altrincham. He has over 10 years' experience helping individuals, families and business owners with mortgages and protection, and writes in plain English because most people aren't given the chance to understand what they're signing.
Your home may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it.
This article is general information, not advice. What's right for you depends on your own circumstances. Acceptance of an application depends on the lender's criteria and is not guaranteed. Fees and charges vary between lenders, so check the details of any mortgage before you commit.
