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Is the cheapest mortgage rate always the best deal?

Arrangement fees can have a huge impact on your finances

Is the cheapest mortgage rate always the best deal?

Four in 10 mortgages now come without any arrangement fees, comparison site Moneyfacts has revealed. So it’s more important than ever to look beyond headlines rates when finding a new mortgage deal.

Two years ago, just 33% of mortgages were fee-free. The figure rose to 36% in July 2017 and now stands at 40%.

But what does this mean if you’re looking to buy a home or remortgage, and how does it relate to mortgage rates?

Below, we explain what arrangement fees are and how much of an impact they could have on your finances.


How do mortgage-arrangement fees work?

While the number of mortgages without arrangement fees is on the rise, with 274 new fee-free products hitting the market this year alone, 60% of deals do still carry fees.

An arrangement fee is a one-off charge for setting up your mortgage, and will typically range from around £499 to £1,999.

When applying, you’ll be given the option of either paying it up front, or adding it onto your mortgage and paying it back over the course of your term.

While the latter option can sound appealing, it’s best to pay the fee up front if you can afford it. If you add the fee to your mortgage loan, interest will be charged for the entire time it takes you to pay it off.

Why are mortgage lenders dropping their fees?

The past few months have seen mortgage lenders becoming increasingly creative in their battle for new customers, and mortgage rates aren’t the only weapons in their arsenal.

In fact, some lenders are deliberately moving away from a rate war, particularly over fixed-rate mortgages, because of speculation about a base rate rise this year. Cue the new focus on dropping arrangement fees.

Charlotte Nelson, finance expert at Moneyfacts, says: ‘Providers have opted to keep rates relatively static, waiting to see whether a base rate rise will come to fruition.

‘By reducing some of their fees to zero, providers are able to remain competitive among their rivals.’

Mortgage rates vs arrangement fees

When people compare mortgages before buying a home or remortgaging, many focus on the initial rate without factoring in the fees.

While the rate is an important factor in determining the best mortgage for you, fees are also a vital consideration.

This is because, once fees are taken into account, the cheapest deal is often not the one with the lowest headline interest rate.

What’s the best way to compare mortgages?

In a bid to try and tackle this problem, comparison sites will often publish an APRC, or ‘annual percentage rate of charge’, for every deal. The APRC takes into account all the costs, including the initial rate, the ‘reversion rate’ (which you’ll be switched onto after the initial deal period of, for example, two years), and fees.

However, APRCs are of limited use because most people tend to remortgage at the end of the initial deal period.

For this reason, it’s often worth talking to a whole-of-market mortgage broker who can look at every available deal to work out which is the cheapest for you.

A good broker should also advise you on the lenders who are best-suited to your situation and most likely to lend to you, and even the banks that are likely to lend you the most money.

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