Mortgage fees hit eight-year high: how to spot a good fixed-rate deal
Fees on fixed-rate mortgages are at the greatest levels seen since 2012, with borrowers now paying an average of lb1,078 to get a mortgage.
New research shows up-front fees have raised by lb60 since June and lenders are offering significantly fewer fee-free mortgage deals than before.
Here, Which? explains why mortgage cost is rising while offering advice on how to find a great deal in the current climate.
Mortgage fees hit highest levels for eight years
New research by Moneyfacts shows fees on fixed-rate mortgages reach the highest levels since November 2012.
The average up-front fee (often called a product fee, arrangement fee or completion fee) at the beginning of November was lb1,078, having risen significantly over the last six months.
The percentage of deals available fee-free has also fallen, from 42% in November 2021 to 34% this month.
Why are mortgage fees important?
When you compare mortgage deals, you’ll immediately be attracted to the headline rate, but this only tells part of the story.
Up-front fees on fixed-rate mortgages currently range from zero to lb2,995, along with a high fee can significantly affect the overall cost of borrowing.
For example, a two-year fix by having an initial fee of 2.49% along with a lb1,499 fee might top the charts, but an offer at 2.55% with no up-front fee is going to be cheaper overall.
Are fees rising because of COVID-19?
Data from Moneyfacts implies that the typical mortgage fee was lb1,040 at the beginning of the COVID-19 outbreak in March, but has now risen by lb38.
The increase comes at a time when lenders are providing significantly fewer deals than before, especially to borrowers with small deposits.
But blaming the pandemic might be too simplistic, and fee increases may instead represent continued competition between lenders.
Eleanor Williams of Moneyfacts says: ‘Lenders may be raising their fees to obtain additional margins within an environment where gains are slim following a rate wars we’ve observed in the previous few years’.
The advantage of fee-free deals
Despite the cuts, it’s great news for borrowers that a third of mortgages (34%) are still available without an up-front fee.
Fee-free deals can be helpful for homebuyers who want to reduce the up-front price of getting a mortgage at any given time when their finances are stretched.
If you’re juggling the various costs of purchasing a home, you might believe that paying a rather higher rate for the mortgage in return for no up-front fee is a good trade-off, but make sure you perform the sums before rushing in.
It can be easy to add some fee for your mortgage, however this might be a mistake, as you’ll be increasing the amount you’re borrowing and will then need to pay interest around the fee as well as the balance.
Do the best deals come with big fees?
Unsurprisingly, the deals with the least expensive initial rates tend to come with higher fees.
When we looked at two-year fixes at 60% and 75% loan-to-value (LTV), we found that none of the top 20 ‘best rate’ deals were available fee-free.
Instead, the cheapest deals most commonly included up-front fees of lb999 or lb1,499.
Broadly speaking, mortgages at higher LTV levels are more likely to be offered fee-free, as lenders seek to attract cash-strapped first-time buyers, but there are so few 90% and 95% mortgages on the market that it’s hard to make the link.
Average fees on fixed-rate mortgages
We’ve checked out every fixed-rate deal on the market, and located that while fees can vary significantly, most deals charge just under lb1,000.
1,125 deals have fees of lb500-lb999, creating 61% of the overall total. On 94% of those mortgages, however, the charge is either lb995 or lb999.
Fees which is between lb1,000 and lb1,499 were also popular, creating 27% of total deals.
Other fees and incentives on mortgages
As along with offering fee-free deals, lenders use other incentives, such as no attorney's fees, no valuation fees, or cashback to entice borrowers.
Moneyfacts says the percentage of deals without legal fees has risen from 49% to 54% since the start of the pandemic. Within the same time, the percentage of mortgages offering no valuation fees has fallen from 71% to 69%.
Cashback incentives are less frequent, with just 25% of deals offering cashback, compared to 31% in March.
How to check mortgage deals
Finding the best mortgage deal can be a tricky business, but we’re here to help with one of these top 5 tips.
1. Compare the overall cost of the deal
As we mentioned earlier, it’s not all concerning the initial rate, and you ought to look at the full price of the deal before making a choice.
When you view mortgages on the lender’s website or comparison site, you’ll end up finding a column called ‘APRC’, which stands for ‘apr of change’.
The APRC gives a sign of the overall rate you’d pay should you stayed using the deal for the full term (for instance 25 or 3 decades).
As you’ll wish to remortgage after your fixed-term, this won’t be entirely representative – however it provides you with a concept of the way the lender’s initial rate and standard variable rate (that you simply revert to after a deal ends) compares to its competitors.
It’s also important to look at any early repayment charges and whether you’ll be permitted to make overpayments without facing a problem.
2. Don’t get drawn in by added incentives
Fee-free incentives can be worthwhile, but additional extras should be considered a ‘nice to have’ facet of an offer rather than a crucial element.
Cashback is really a prime example. Most lenders is only going to offer relatively modest amounts such as lb250 or lb500, which won’t make a dramatic difference in the general scheme of things.
And as previously mentioned, free attorney's fees and valuations are generally available, so don’t place an excessive amount of stock during these.
3. Think twice before fixing for longer
Five-year fixes have become extremely popular in the last couple of years, with lenders offering rock-bottom rates to convince borrowers to secure for extended.
Unfortunately, many of these deals come with high early repayment charges, which may be around 5% from the mortgage balance within the newbie.
With this in mind, consider your future plans before selecting a long-term deal. Fixes of anything from two to 10 years are generally available, so result in the mortgage fit your circumstances as opposed to the other way around.
4. Find the right lender
There are a large number of mortgage brokers available, and some offer a lot better deals and customer support than the others.
Check out our 2021 mortgage lender reviews to see which lenders offered the best of all possible worlds, and find out who we named our Which? Recommended Providers.
5. Take advice from a mortgage broker
It’s been a hard year for that mortgage market, with lenders seeing their resources stretched and borrowers having fewer options than ever before.
In such an uncertain time, it makes sense to take advice from a whole-of-market mortgage broker, who can assess all of the deals on the market to find the right one for you.
For tips on things to look for within an adviser, check out our full guide on finding the best large financial company.
