Fees
Fee or no fee? Working out which mortgage is really cheaper
Many lenders offer the same deal two ways: a lower rate with a product fee of around £1,000, or a slightly higher rate with no fee at all. Which one is cheaper is not a matter of opinion. It comes down to one thing above all: how much you are borrowing.
Why loan size decides it
The fee is a fixed amount. The saving from a lower rate grows with the size of the loan. So on a small mortgage the fee is hard to win back, and on a large one the lower rate wins easily.
Here is an illustrative 2 year fix offered two ways, 5.20% with a £999 fee or 5.45% with no fee, over a 25 year term:
| Loan | Monthly with fee deal | Monthly with no-fee deal | Cheaper over 2 years |
|---|---|---|---|
| £100,000 | £596.30 | £611.11 | No fee, by £644 |
| £150,000 | £894.45 | £916.66 | No fee, by £466 |
| £240,000 | £1,431.12 | £1,466.65 | No fee, by £146 |
| £400,000 | £2,385.21 | £2,444.42 | Fee deal, by £422 |
For this pair of deals the break-even point is a loan of about £281,000. Below that, the no-fee deal costs less over the two years; above it, paying the fee works out cheaper.
The lowest rate is not always the cheapest deal. Compare the total of all your payments over the deal plus the fee.
Adding the fee to the loan
Most lenders let you add the fee to the mortgage rather than paying it upfront. That keeps cash in your pocket, but you then pay interest on the fee for as long as it sits in the loan. Adding £999 to a 5.20% mortgage over 25 years adds about £6 a month. If the rate stayed the same for the whole term, you would pay around £790 in interest on top of the fee itself.
In practice you will remortgage long before then, so the real cost is smaller, but the fee does not disappear: it becomes part of what you owe.
Other things to check
- Deal length. A fee spread over five years matters less each year than one spread over two. On a 5 year fix the break-even loan is usually lower.
- Other costs. Some deals come with free valuation, free legal work or cashback, which can be worth several hundred pounds. Those extras are not in our figures, so check the lender's details.
- Remortgaging. With a 2 year deal you will probably pay a fee again in two years. That is one reason fee-free deals suit smaller loans on short fixes.
Comparing on Excelergy Mortgages
The Cost over deal column already does this sum for your loan: every monthly payment during the deal plus the fee. Pick a term, then sort by Cost over deal to see which way round it falls for you. The Fee filter lets you look only at no-fee deals, or set a maximum fee.