What are lender’s mortgage product fees?
Lender’s mortgage product fees are fees charged by the mortgage lender at outset on a some mortgage products. These fees can be added to the mortgage lending, or paid upfront.
A lender’s mortgage product fee offers these benefits to the borrower:
- Access to a lower interest rate
- Lower initial payments
A lender’s mortgage product fee offers these benefits to the lender:
- The income from the fee contributes to the cost of setting up the deal
- Using a mortgage product fee to maintain profit enables a lower interest rate to be quoted in comparison tables
Should I take a rate with the lender’s mortgage product fee?
This is one of the most common questions that mortgage brokers handle. The answer differs in each individual case.
Key factors that indicate whether a lenders mortgage product fee is cost-effective are:
- The level of borrowing
- The saving in rate against fee size
- The mortgage term
- The rate term
- The mortgage repayment basis
Level of borrowing
The more you borrow, the more you save on a lower interest rate. Since most lender’s mortgage product fees are a set amount, the bigger your mortgage, the more attractive a reduced rate with the lender’s mortgage product fee may be.
Rate against fee size
Sometimes there is a big interest saving available for a modest fee. Sometimes the difference is so small there is little value in paying the lender’s mortgage product fee for the lower mortgage rate.
Mortgage term
This is a factor if the borrower intends to add the lender’s mortgage product fee to the borrowing. Interest will be charged on the mortgage product fee and over the length of the mortgage term this can be much more than the interest saving on the mortgage.
Product term
The longer you benefit from a lower interest rate, the more worthwhile it is to pay a lender’s mortgage product fee. Paying a fee to save on your interest rate over five years will be a very different calculation against paying a fee to save on your interest rate over two years.
Mortgage repayment basis
Most mortgages are set up on a capital repayment basis. Under this arrangement each monthly payment covers the interest on the loan and pays a little off of the capital owed.
Some mortgages, particularly those taken out by landlords on rented property (buy to let), are set up interest only. Under this arrangement each monthly payment covers the interest on the loan only and the capital is not repaid monthly. At the end of the mortgage term the lender will require the capital to be repaid in full.
Occasionally mortgages are set up partially on a capital repayment basis and partially interest only, this is known as a split repayment basis.
On an interest only mortgage where the capital owed is not reducing, the long-term cost of higher interest rates is greatly increased. This can make products with lender’s mortgage product fees more attractive.
Should I add my mortgage product fee to my borrowing?
An important thing to remember is that a mortgage product fee paid upfront incurs no further cost. A mortgage product fee added to your borrowing accrues interest for as long as it is on your mortgage account. This makes the mortgage product fee much more expensive over the long term.
We recommend that borrowers either, pay the lender’s mortgage product fee upfront, or if added to the lending, pay it back over the term of the mortgage product.
How do I know if a mortgage rate with a mortgage product fee is beneficial to me?
Your mortgage broker can assist you to establish which mortgage product is most cost effective for you given both the interest rate and fees charged.
Very often, the difference between a lower priced rate with the fee charged, and a higher-priced rate with no fee is minimal. The more you are borrowing, the more likely a mortgage product fee charged rate is to be beneficial to you.
Simple ways to calculate if you should consider a mortgage product fee charged rate
Full calculations on the effectiveness of mortgage product fee charged mortgage rates are complex if calculated to the penny. But it is fairly simple in many cases, to take a quick view to see if you should be considering rates with fees.
Example
£100,000 of borrowing
Rates available over two years
4.50% with no mortgage product fee
4.25% with £995 mortgage product fee
The potential saving here is 0.25% on £100,000 over two years
If you simply use your calculator as follows
£100,000 X 0.25 % X 2 = £500
(this gives you the value of a 0.25% saving on £100,000 over two years)
Clearly, there is no value in the rate with the lender’s mortgage product fee in this case as the saving is around £500 against the fee cost of £995.
Example two
£300,000 of borrowing
Rates available over two years
4.50% with no mortgage product fee
4.25% with £995 mortgage product fee
The potential saving here is 0.25% on £300,000 over two years
If you simply use your calculator as follows
£300,000 X 0.25 % X 2 = £1,500
(this gives you the value of a 0.25% saving on £300,000 over two years)
In this case a potential interest saving of £1,500 against the mortgage product fee cost of £995 is worth considering.
Can I not simply work out the difference between monthly payments?
Looking at the difference in monthly payments is the most common method we see borrowers use to establish if a fee paid product is for them. For most residential borrowers it simply does not work. Let’s look at this with an example.
A mortgage is a long-term loan on which interest is charged. Typically in the UK loans are set up over 20 to 30 years (although they can be shorter or longer)
If a borrower requests a mortgage of £150,000 over 25 years, the lender has to work out a monthly cost including the monthly payment of interest on the borrowing.
On a 4.5% interest rate this will be in the order of £834 per month.
If a 4.0% interest rate were available monthly payments would total £792 per month
The difference in monthly payments is £42, over a mortgage product term of two years, the calculation would be:
£42 x 24 = £1,008
If the mortgage product fee charged is £995, there appears to be no saving on the lower interest rate.
Why is this not the full story?
The difference in monthly payments between the two products is the difference in interest charged.
A 0.5% saving on the interest rate on a £150,000 mortgage is worth around £750 a year, over two years that totals £1,500.
In this example the lower interest rate product with the lender’s mortgage product fee is actually worth considering.
If you are interested to find out why so little capital was repaid against such a large interest bill we explain this below
Why is so little of my monthly mortgage payment going to pay off capital?
When the lender agrees a mortgage arrangement, a calculation for the monthly payment has to be made. Early in the mortgage term where the mortgage balance is higher, the interest cost is also higher.
In our example earlier on this page, an interest rate of 4.00% on lending of £150,000 is £500 a month.
If our borrower were to pay off a £150,000 mortgage without interest, evenly over 25 years, this would work out at £500 capital repaid a month.
If we add interest at 4.00%, in the first year our borrower will be paying £500 capital and £500 interest monthly, total monthly repayments £1,000.
Instead of this, the Lender looks for less capital back monthly in the early years when interest costs are higher, and sets a more manageable monthly payment of £792 per month over the 25 year mortgage term.
Later in the 25 year mortgage term, the interest cost is much lower and the bulk of the monthly £792 paid is repaying capital.
Considering this, you can see that the more you pay off of your mortgage early, the more interest you will save overall.