Fee-free mortgage products

Journalist: Anna Sagar, Mortgage Solutions / Specialist Lending Solutions

ended 07. June 2022

Looking to speak to mortgage brokers about fee-free mortgages. 

  1. Are they becoming more popular with borrowers? Why do you think that is? 
  2. When would you recommend a fee-free mortgage product? What are the advantages?
  3. When would you not recommend one? What are the disadvantages?
  4. Do you think they will become more popular amongst borrowers and why? 

5 responses from the Newspage community

When it comes to paying a booking fee or not, there is no right or wrong answer; it can only be determined through careful consideration of an individual's circumstances and plans. Often if the mortgage is on the smaller side, you tend not to recoup the cost of the booking fee over the initial period. On the other hand, the bigger the mortgage, it often makes sense to pay the fee, resulting in paying less interest during the initial period and saving more than the cost of the fee itself. If allowed by the lender and elected by the customer, you may be able to add the fee to the loan rather than paying it at the point of application. There can be no advantages or disadvantages without knowing a specific scenario; it's like asking if someone should take a particular medicine - the question doesn't make sense without having a patient in front of you.
It's easy to get caught up debating a single fee in isolation and lose sight of the big picture, which is getting the cheapest overall deal that meets the client's needs and priorities. This is 'suitable advice'. "Equally, not all borrowers are eligible for all mortgages or lenders. A scenario can often not meet the lending criteria of a particular provider, which rules them out. For example, the client may require a certain level of borrowing, or have a complex income which means only certain mortgage lenders are available. So a comparison of cost can only be made across mortgage lenders that are available, regardless of whether a fee-free product is available elsewhere. "The fairest way to compare the 'true cost' of mortgages is to compare all costs over the initial fixed rate period, because after this period the client will move to a better deal anyway, either with the same lender or another one. This strategy takes into account all the fees due, the interest rate, and any incentives such as cashback or free legal services, to enable a true like-for-like comparison which can be applied to any available mortgage, to show the client the best overall deal in an easy-to-understand format.
There are a few factors to take into account when assessing whether a fee-free product is worthwhile compared to one with a fee. Firstly, fee-free products tend to come with a higher interest rate in contrast to those with a fee, so the impact of this needs to be calculated. Secondly, if the fee is being added to the loan then it will incur interest, which also needs to be considered. Finally, the capital balance needs to be factored in as the mortgage balance will reduce faster on a lower rate. This can easily be overlooked but over the course of a few years can make a big difference. In general, the lower the mortgage balance the more likely it is that a fee-free product is going to be most cost-effective solution.
There is no set rule for fee-free or fee-based products as it's always about what is best for the client and the overall cost to the client over the term of the product. Even where there isn't a fee, lenders will usually price these products accordingly so they can cost the borrower more if they do not get proper advice. I don't see them being any more or less popular than they are now for any clients receiving advice.
I have found fee free mortgages to be most popular with first time buyers where all savings have gone towards getting a large enough deposit. I would not say this has become any more popular recently however I think this will see a rise in popularity should the amount of lender offering 90% mortgages be reduced. I would not recommend a fee free product over another product with fees if this fee free product was more expensive in the long run. My main reasoning for this is that almost all lenders allow you to add the arrangement fee (the largest fee) to the loan. I would only recommend free valuation / free booking fee products over a cheaper product and that would only be when the client is not confident on how the property will value up. This can be really helpful so where properties are down valued, which is becoming more prevalent these days, so that the client doesn't lose any money if they have to pull out as a result of the report.