In this article, we explain how mortgage product fees work, how much they can cost and the pros and cons of paying a product fee on your mortgage deal.
What is a product fee on a mortgage?
A product fee is a payment to your lender that covers the administration costs of arranging your mortgage loan to your lender. Product fees can be referred to as the lender's fee, an application fee, booking fee or an arrangement fee. It is usually detailed alongside the interest rate offered by the lender when getting mortgage quotes online.
How much is a mortgage product fee?
Mortgage product fees are normally charged between £0 and £2,000 depending on the mortgage deal that you choose. However, some mortgage deals can carry a much higher lending charge and could even be as much as £3,000 to £9,000, however, these are usually associated with buy-to-let mortgages. Fee-free mortgage deals refer to those that do not charge a product fee and these are more common with first-time buyer mortgages as well as homebuyer and remortgage deals.
Is it worth paying a mortgage product fee?
It really depends. A mortgage deal with a product fee will often charge a lower interest rate throughout the duration of the mortgage and this is often the key reason for choosing a mortgage product that charges a product fee. It is for this reason that it is wise to conduct a thorough search of the mortgage market to determine whether the deal that you have found reflects the best overall value. If you are unsure about which mortgage deals offer better value, you should speak with a mortgage specialist* who will advise you on the best mortgage options for your needs and priorities.
Below, we have sourced and compared two mortgage deals - one that charges a product fee and offers a lower interest rate while the other charges no product fee but a slightly higher interest rate. For the purposes of the example, we have searched for a mortgage deal based on a purchase price of £250,000 and a deposit of £50,000 over 25 years on a repayment basis.
Product fee vs No Product fee
| Mortgage deal with a product fee | Mortgage deal without a product fee | |
| Mortgage interest rate | 4.57% | 5.14% |
| Mortgage product fee | £1,525 | £0 |
| Period of mortgage deal | 2 years | 2 years |
| The overall cost of the mortgage over the deal period | £28,396 | £28,453 |
The above example demonstrates that the fee-free mortgage is actually more expensive than the mortgage deal that charges a product fee. This is not always the case, however, and so the best value deal for you will be based on your personal circumstances.
Our mortgage rate comparison tool allows you to search for mortgage deals with the lowest interest rate, the lowest upfront fees, lowest overall cost as well as the lowest cost over the deal period. This can help you to compare the mortgage providers that offer the best value for money.
Can I add the product fee to the mortgage?
Yes, most lenders will allow you to add the arrangement fee to the mortgage loan but you should be aware that by doing so, the product fee will accrue interest at the same rate as your mortgage loan. Depending on the size of the product fee and the interest rate, this could amount to a significant additional cost. It can, however, be a helpful option that can free up some of your cash reserves for other costs associated with arranging your mortgage loan, such as legal fees, stamp duty and a mortgage deposit.
It is important to consider that you could impact your loan to value (LTV) if you decide to add your product fee to your mortgage. This could impact the rate that you are offered as mortgage deals are usually only offered based on a maximum LTV limit.
Should I pay a mortgage product fee upfront?
Where possible, you should try to pay the mortgage product fee upfront because adding the cost of it to your mortgage loan will mean that you accrue and pay interest on it, making it more expensive. In the long run, adding your mortgage product fee to your mortgage loan each time could increase the overall costs of your mortgage.
Are mortgage product fees tax deductible?
Mortgage product fees are unlikely to qualify for tax relief. However, you should check the details of this with your accountant as there may be allowances for the ongoing maintenance of your rental property. Changes were introduced to the tax treatment of mortgage interest payments which you can read about in our article, "How will your rental income be taxed? Everything you need to know".
Pros and Cons of paying a mortgage product fee
Pros
- You could get a better interest rate by paying a product fee
- Your monthly mortgage payment could be lower as a result of achieving a lower interest rate
- In some cases your mortgage product fee could be tax deductible
Cons
- You may have to pay interest on the product fee if you add it to your mortgage
- A low product fee might not achieve a better deal when compared to deals that do not charge a fee
How to get the best mortgage deal
A mortgage is one of the most expensive financial commitments you can make and so choosing the best mortgage deal could save you thousands over the course of the full mortgage term. For this reason, it is a good idea to ensure that you have sourced the best mortgage deal for your particular circumstances. There are a number of mortgage options that you will need to consider besides the product fee charged by your lender. You will need to work out whether you want a fixed-rate mortgage, tracker-rate mortgage or a discount-rate mortgage. Valuation fees, cashback offers and legal costs will also feature in weighing up different mortgage offers. You may also need to consider whether the lender allows overpayments, whether there are any early repayment charges and if the lender charges exit fees.
Mortgage brokers can help you to work out which options suit you best and they can search the whole mortgage market for the best deals. Additionally, some mortgage deals are only available through a mortgage adviser. Although some mortgage brokers will charge you a fee for arranging your mortgage, others will not as they are all paid a procuration fee from the lender. Habito* is an online mortgage broker that does not charge a fee for arranging your mortgage and has access to over 90 lenders' mortgage deals. We have vetted the mortgage broking services provided by Habito and the advisers are highly knowledgeable, efficient and helpful. They will source a mortgage deal based on your personal preferences and budget, helping you apply for a mortgage that bests suits you.
Alternatively, you can source a vetted mortgage broker in your area via VouchedFor*.
If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. The following link can be used if you do not wish to help Money to the Masses - Habito, Vouchedfor
