When you go shopping for a mortgage you’re bound to face a decision between choosing a cheap interest rate mortgage or a higher rate mortgage with no, or very low, up front costs.

We’ve all seen them in the national press and on the Internet – mortgages with incredibly low interest rates. Lenders know that it’s a low interest rate that pulls in the punters so they bust a gut to out do their opposition. The only problem is that these super low rates mean that the lenders have to recover some of their money in other ways. High arrangement fees is a classic solution.

Arrangement fees are charged to cover the cost of administering the mortgage application and reserving the mortgage monies. Sometimes these fees can be added to the mortgage and sometimes they have to be paid upfront. And they can vary greatly, not only between lenders but even between the mortgages offered by the same lender.

Most arrangement fees are in the £399 to £699 range and clearly work out cheaper for larger mortgages. But some lenders such as the Stroud & Swindon Building Society, charge 1% fees on top of some of their mortgages. On a £150,000 mortgage that’s a whacking £1,500! Not to be taken lightly!

There’s no doubt that whilst we’ve seen arrangement fees steadily increase, a number of lenders have used them to reduce headline interest rates. The Bank of Scotland being a recent example. Other lenders will even give you a choice – either pay a fee and have a low interest rate or fee free and pay a higher rate.

This means that it’s essential to you find out which is the best option for you. If you expect to stay in the house for only a few years or you intend to re-mortgage as soon as any special offer rate runs out, you can afford to take a short-term view. In our experience, it’s not always easy to get these calculations right, so we think it’s best to use a mortgage broker to do the figures and then source the deal that’s best for you. That way you’ll avoid a potentially costly mistake.

Take the following basic example. Say you’re looking at a 2 year interest only mortgage for £100,000 at an interest rate of 4.5%. That will cost you £4,500 a year. If the mortgage attracted an arrangement fee of £699 and the purchaser was expecting to re-mortgage after the interest deal expired in two years time, the mortgage will cost £9,669 over the two years. If the alternative was an interest rate of 5% but without a fee, the two year cost would be £10,000. So in this case it’s worth getting the 4.5% deal and paying the fee.

In our experience, you’re likely to find that the bigger your mortgage and the longer you are tied into the mortgage, the more important the interest rate will be rather than the fee.

More Mortgage FAQ’s
More Mortgage Articles

Technocrati Tags[mortgages]