Mortgage arrangement fee: should I pay this upfront or add it to my mortgage?

According to the Office for National Statistics, 28% of UK homes – that’s almost 7 million – are owned with a mortgage. For many borrowers, the application process is a pivotal part of moving home but one area that’s often overlooked is the mortgage arrangement fee. In this blog, we discuss what a mortgage arrangement fee is, when it’s due and how best to pay it.

A bonus to using a broker

Although it is possible to take out a mortgage directly with a lender, many homebuyers choose to use a mortgage broker. As well as having access to thousands of home loans offered by a variety of banks and building societies, many brokers will arrange a mortgage for you at no charge. Instead of the borrower paying for the professional’s time and expertise, the broker will be paid a commission by the chosen lender.

Lenders need to cover costs

That doesn’t mean securing a mortgage is cost free. Most mortgages carry an arrangement fee - also known as a product fee. This cost is imposed by the lender directly to the borrower when the mortgage is approved, covering the lender’s costs to set up the mortgage.

Mortgage arrangement fees are usually in the region of £1,000 to £1,500 but lenders will sometimes use the rounding down or ‘charm pricing’ tactic when displaying fees to make borrowers feel like they’re paying less. Expect to see an arrangement fee of £999 or £1,499, for example.

Tactics to double check

Although not as common as a fixed fee, some lenders will express the arrangement cost as a percentage of the purchase price. This method of calculation can be incredibly punishing for high-value home purchases, so always check with the broker or lender. It’s also worth noting that some of the mortgage products with the lowest interest rates carry the highest arrangement fees.

Use it or lose it

A borrower has two options when it comes to paying the mortgage arrangement fee: pay up front when the mortgage is agreed, or add the fee to the total they are borrowing. Paying upfront will reduce your debt but you do risk losing the arrangement fee if you decide not to go through with the mortgage.

As moving home is one of life’s most expensive exercises, not all borrowers have surplus funds to pay the arrangement fee upfront. As such, it is tempting to add the sum to the overall mortgage.

Avoiding long-term pain

If you opt to add the arrangement fee to your mortgage, you’ll pay interest on it for the duration of the loan from day one. If this is your preferred option, it’s imperative to ask your mortgage broker to run some figures for you.

Ask them to work out whether a lower-rate mortgage with a high arrangement fee will actually work out more expensive in the long run than choosing a higher-rate mortgage with a lower arrangement fee. You might be surprised how adding an arrangement fee to a mortgage can adversely affect repayments.

Clearing the fee quickly

There are alternatives if you don’t want to risk losing your arrangement fee but don’t want to pay interest on it either. You could ask your broker to add the arrangement fee to your mortgage but use your first repayment to overpay the exact fee amount. If this sounds appealing, ensure you tell your broker the plan as they’ll make sure they find you a mortgage where there are no overpayment penalties.

Another option is to take out an interest-free credit card and pay the mortgage arrangement fee using this credit method. It’s vital you double check that your lender will accept a credit card payment before you commit to this plan.

Additionally, you should clear the credit card’s balance before the interest-free period ends as it’s almost certain the card’s standard interest rate (which you’ll automatically flip to) will be much higher than the rate attached to your mortgage.

Advice available

If you are looking to take out your first home loan or need to remortgage to move up the property ladder, White & Brooks can recommend a broker local to you. Please contact your nearest branch for advice and an appointment.