What are product fees on mortgages?
What are product fees on mortgages?
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What are product fees on mortgages?
What are product fees on mortgages?
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When searching for the right mortgage deal, you’ll often see something called a mortgage product fee. This is a charge set by the lender for arranging your mortgage product, and it can significantly impact the overall cost of your loan. Understanding how mortgage product fees work — and whether you should add the product fee to mortgage or pay it upfront — is crucial to making the right decision for your financial situation. While adding the fee to your mortgage can reduce your immediate upfront costs, it means you’ll pay interest on that fee over the lifetime of the loan. On the other hand, paying the mortgage product fee upfront avoids additional interest, but it requires you to have more cash available at the point of completion. In this guide, we’ll explain the long-term cost implications of adding the product fee versus paying it upfront and how to compare deals that have low rates but high fees versus higher rates with no fees.
What is a mortgage product fee?
A mortgage product fee is a one-off charge applied by lenders for setting up a specific mortgage deal. It’s sometimes called an arrangement fee, completion fee, or booking fee depending on the lender. Lenders use product fees as a way to offer lower headline interest rates while still covering the administrative and risk-related costs involved in processing the loan. In many cases, the lower the interest rate, the higher the mortgage product fee. Paying attention to the product fee is important because it directly affects the overall cost of your mortgage, especially over the fixed or initial term.
Mortgage product fees
- Residential mortgages often have product fees ranging from £500 to £1,500.
- Buy-to-let mortgages typically come with higher product fees, usually between £1,000 and £2,500, or sometimes a percentage of the loan amount (around 1-2%).
Specialist mortgages, such as zero hour contract mortgages or self-employed mortgages, may have slightly higher product fees, generally in the range of £1,000 to £2,000. Fee-free mortgage deals are available but usually come with a higher interest rate, meaning you may end up paying more in the long run despite avoiding an upfront charge. Understanding the balance between the mortgage interest rate and the product fee is key to identifying the true cost of a deal.
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Cost implications - Adding product fees to mortgage
When you take out a mortgage with a mortgage product fee, you’re usually given two options – pay the fee upfront or add the product fee to your mortgage. Each choice has different long-term cost implications, and it’s important to understand how they affect the overall amount you repay. If you pay the product fee upfront, you simply pay the agreed amount at the start, typically at the point of completion.
- This keeps your mortgage balance lower.
- You avoid paying interest on the fee over the mortgage term.
- Over the life of the mortgage, this option saves you money because you’re not borrowing more than necessary.
- If you add the product fee to your mortgage, you roll the fee into your total loan amount.
- This increases your mortgage balance.
- You will pay interest on the product fee for the entire mortgage term (often 25 years or more).
Even though it reduces your immediate upfront costs, it can significantly increase the total amount you repay over time, for example:
If you have a £1,000 mortgage product fee and add it to a 25-year mortgage with an interest rate of 5%, you won’t just pay back £1,000 — you could end up repaying around £1,750 once you include interest over the full term. Paying upfront is almost always cheaper in the long run if you can afford it without stretching yourself too thin. Adding the fee to the mortgage is a useful option if you need to protect your cash flow during a move or home purchase, but it will cost more overall.
Are these mortgage options cheaper?
Mortgage product fees can sometimes make a deal seem cheaper than it actually is. Many lenders offer very low interest rates on products that come with a high mortgage product fee. At first glance, the low rate is appealing because it suggests lower monthly repayments. However, once you factor in the cost of the product fee — especially if you add the product fee to your mortgage and pay interest on it over time, the overall cost of the deal can be higher than it seems. In some cases, even after including the product fee, the mortgage is genuinely cheaper over the fixed or initial period. This usually happens when:
- The mortgage rate is significantly lower than other available options.
- You plan to stay in the mortgage for the full term of the fixed-rate or discounted period, maximising the benefit of the lower monthly payments.
- You can pay the product fee upfront, avoiding extra interest charges.
However, if you are likely to re-mortgage, move home, or repay the loan early, paying a large mortgage product fee could end up costing you more than choosing a slightly higher-rate, fee-free product.
A true cost calculation looks at:
- The total cost of monthly repayments over the fixed or initial term.
- The impact of the product fee, whether paid upfront or added to the mortgage.
- Any early repayment charges, valuation fees, or other associated costs.
By comparing the full cost of different mortgage options, not just the interest rate, you can make a properly informed decision about which deal will save you the most money overall. We specialise in helping clients with true cost comparisons, making sure you’re not misled by low rates that could end up being more expensive in the long run.
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Questions on mortgage product fees
A mortgage product fee is usually payable either on completion of your mortgage or at the time you submit your mortgage application, depending on the lender. Some lenders allow you to choose whether to pay it upfront or add product fee to mortgage to be repaid over the life of the loan.
Product fees on mortgages are charges set by lenders for arranging a specific mortgage product. Mortgage product fees help lenders cover their costs and are typically associated with mortgages offering lower interest rates. These fees vary between lenders and mortgage types.
A mortgage product fee is a one-off charge by the lender for arranging your mortgage. It is typically linked to deals that offer lower rates. Borrowers can either pay this fee upfront or add product fee to mortgage, depending on their financial situation and the lender’s terms.
You should pay the product fee upfront if you can afford it without affecting your financial stability. This avoids paying interest on the fee over the life of the loan. However, if funds are tight, adding it to the mortgage can be a practical short-term solution.
The product fee charge is the amount a lender charges for setting up your mortgage deal. It is either a fixed fee or a percentage of the mortgage loan amount and is a key cost to consider when calculating the true cost of any mortgage offer.
Yes, it is normal for mortgage brokers to charge a fee. Many brokers either charge a flat fee, a percentage of the loan amount, or receive commission from the lender. Always confirm upfront whether your broker charges a fee and what services are included.
When comparing mortgage deals — especially when deciding whether to pay or add a product fee to mortgage — it’s essential to work out the true cost. This means looking beyond just the interest rate or monthly repayment and calculating the total amount you’ll pay over the initial deal period (such as a 2-year or 5-year fixed rate).
- Work out the total monthly repayments: calculate your monthly mortgage payment based on the interest rate and loan amount. If you’re adding the product fee to your mortgage, include that in the loan total.
- Multiply by the number of months in the deal: multiply your monthly repayment by the number of months in your fixed or discounted term (e.g., 24 months for a 2-year fixed deal).
- Add the product fee: if you are paying the product fee upfront, simply add it to your total cost once. If you add the product fee to the mortgage, remember that you’re paying interest on it. Include the extra cost of interest over the fixed term based on your repayment amount.
- Include any other fees: some mortgages come with valuation fees, arrangement fees, or early repayment charges. If these apply, add them into your calculation.
- Compare the total cost: now, compare the total cost of each mortgage deal over the same period — including both monthly payments and fees — to see which option is genuinely cheaper.
A product fee mortgage is a mortgage deal that includes an upfront fee charged by the lender for securing a particular rate or product. These deals often offer lower interest rates but include a mortgage product fee that you either pay upfront or add to the mortgage balance.
Whether to add product fee to mortgage or not depends on your circumstances. If paying it upfront would leave you short of funds for your deposit or moving costs, adding it might be sensible. However, if you can afford to pay it without stretching your budget, it’s usually cheaper overall not to add it to the mortgage.
It can be worth paying a product fee on a mortgage if the lower interest rate offered results in overall savings across the initial fixed or discounted term. A true cost calculation is essential to weigh up whether the lower monthly repayments outweigh the fee.
In most cases, once a mortgage completes, the mortgage product fee is non-refundable. If your mortgage falls through before completion, some lenders may refund the fee, but this varies widely. Always check your lender’s terms and conditions before proceeding.
Product fees are often higher on buy to let mortgages because lenders view these loans as higher risk. To offset this risk and maintain competitive interest rates, lenders charge larger product fees, sometimes up to 2% of the loan amount, to cover additional underwriting and administrative costs.
No, not all mortgages have product fees. Some lenders offer fee-free deals, though they often come with slightly higher interest rates. It’s important to compare both fee-free and fee-paying mortgages carefully, as sometimes paying a mortgage product fee leads to a cheaper deal overall once you calculate the true cost.