Would you add a product fee to your 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 or even a percentage of the mortgage amount for example 3% of the amount, 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.

So does it make sense to pay 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 to a mortgage adviser 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.

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.

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.

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