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Factor in higher mortgage fees

By MoneySupermarket.com  |  Posted: June 08, 2012

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When shopping around for a new mortgage deal, most people concentrate on the interest rate charged.

But while this is a good starting point, it's also crucial to take into account the associated fees, which have soared by 18% since 2009 according to recent MoneySupermarket research.

After all, there is no point paying a high fee to transfer a small mortgage to a low rate if the cost of the fee will outweigh the savings you make while paying it off.

Clare Francis, mortgage expert at MoneySupermarket said: "Fees can vary greatly between mortgage providers. So when comparing deals you should always look at the total amount you would repay, including fees, over the term of the deal. This is the only way to identify which product will be the best value to you."

Here, we explain how to work out when it is worth paying a higher fee to get a lower rate - and highlight some of the best mortgage deals that come with low fees as well as low rates.

How much difference do mortgage fees really make?

The fees on both fixed and tracker mortgage products have shot up by more than 18% since September 2009, analysis from MoneySupermarket shows.

During this time, the average application fee for fixed mortgages has jumped from £705 to £806, while the charge on a typical tracker mortgage has leapt from £772 to £954.

The so-called booking fees on tracker mortgages have also risen from an average of £247 in September 2009 to £314 today.

David Hollingworth of broker London & Country said: "Most lenders have a range of fee and interest rate options.

"However, typical fees stand at about £1,000, while some banks and building societies charge percentage fees that can be up to 3.5% of the amount borrowed."

As a result, many of the home loans with the lowest headline rates do not offer the best value for money over the term of the deal.

To illustrate this, let's take a closer look at the lowest two-year fixed rate mortgage on the market at the moment, from HSBC.

It has a very appealing headline interest rate of just 2.64%. If you borrowed £150,000 and paid back the capital and interest with no additional fees, this would equate to a total cost of £16,545 over the two years. But add on the combined booking and arrangement fee of £1,999 and the amount rockets to £18,404.20.

Consequently, by borrowing the same amount on a two-year fix at higher 2.78% with Bank of Ireland, you could pay back just £17,461.48 over the two-year term - a saving of £942.72 - because the fee is just £799.

Even a NatWest loan of £150,000 at 2.99% for two years comes out slightly cheaper a £18,051.96 over the term, due to its lower fee of £999.

Is it ever worth paying a higher fee?

The impact the size of the fee has on the overall value of a deal depends largely on the size of the mortgage.

You will pay the interest charged on the amount you borrow, so paying a higher fee to obtain a lower interest rate can prove a sensible option if you are borrowing a large amount.

"For some people, it may be worth paying a high fee in order to benefit from the lowest interest rate," said Clare Francis. "It will all depend on the amount you are looking to borrow."

You can see how this works by taking the three mortgages described above and looking at which works out cheaper for larger and smaller amounts.

On borrowing of £100,000 for example, the Bank of Ireland deal with a fee of just £799 is streets ahead at a total cost of £11,907.40 (compared to £12,935.80 with HSBC or £12,367.56 with NatWest).

But on a £200,000 loan, the gap has narrowed considerably, with the total cost of the Bank of Ireland deal coming in at £23,015.80 (compared to £23,872.60 with HSBC and £23,736.12 with NatWest).

How can I work out the total cost of a mortgage deal?

The easiest way to calculate the total cost of a mortgage deal you are considering applying for is to multiply the monthly cost by the number of months in the term and then add on any fees.

So if, for example, you are looking at a three-year mortgage deal with a monthly payment of £1,000 and upfront fees of £999, you would times £1,000 by 36 and add £999 - giving a total cost of £36,999.

Remember there are variables that could make this figure not quite accurate - especially with tracker mortgages where the rate could change.

"If you opt for a variable rate mortgage you need to ensure that you will be able to afford your monthly repayments if and when interest rates rise," said Clare Francis.

However, working out the total cost this way will at least give you an idea of whether or not it is worth paying a higher fee to secure a lower interest rate in the first place.

"This calculation will give you a good idea of the total cost over the term," said David Hollingworth.

"For those with more complicated affairs, however, it may be worth approaching a mortgage broker."

Are there any mortgage deals offering low rates and low fees?

While you will generally find that the mortgage deals with the lowest rates come with relatively high fees, there are some deals that offer the best of both worlds.

Deals with low fees and competitive rates available at the moment include Vernon Building Society's three-year discount mortgage at 2.99% with a fee of just £499 and Cumberland Building Society's two-year fix, also at 2.99% with a £699 fee.

You must have a 30% deposit to qualify for the Vernon mortgage though, while the Cumberland requires an even heftier deposit of 40%.

Please note: Any rates or deals mentioned in this article were available at the time of writing.

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