The ‘fee’ that puts a year and half between you and your mortgage

Homebuyers who add increasingly high mortgage application charges to their total debt risk taking as long as 17 months just to clear the application fee.

New figures from moneysupermarket.com reveal borrowers taking out an average £150,000 on a two year fixed-rate Northern Rock mortgage with an application fee of £5,250 will spend almost the whole deal period paying off the fee – and only seven months clearing the real mortgage debt. The Abbey offers a fixed rate deal at 5.14 per cent with a much lower application fee of £999. In contrast to the Northern Rock deal, a person making regular payments on this latter deal will have paid off the application fee in just four months and can then start to repay the capital.

With the Bank of England base rate on the up, and an increase in the number of in fixed-rate products, homebuyers and remortgagers are finding it ever harder to find good deals without high application fees. Borrowers have two options if they want to avoid this “fee sentence”. If possible they should pay the application fee upfront so the first monthly payment goes towards the actual mortgage and not the fee. However, if they do not have the ready cash to do this they should look for products with a lower application fee so they can pay it off much faster.

Due to the lower pay rate someone choosing the Northern Rock product will pay £49 a month less than the Abbey product (equating to £1,180 over two years), but they will only reduce their total mortgage debt by a measly £1,455 compared to £4,717 with the Abbey offer. So, despite the higher monthly payments Abbey borrowers would be £2,082 better off over the two years.

Louise Cuming, head of mortgages at moneysupermarket.com, said: “This calculation is key – people should look beyond the monthly payments, and instead on what will actually be paid off over the term of a deal. It can be worth it to pay a little more each month if that means you are paying off the actual mortgage and not just the fee.

“However, I would urge anyone who can afford to do so to pay the application fee up front, or as quickly as possible within the product terms by making overpayments. Borrowers need to remember that not only will the fee take time to pay off, but it will also be subject to interest. Therefore, if someone has adequate savings, they would be well advised to pay this fee in the first instance. Failing this they could consider a deal with a lower application fee. Though neither a low headline rate nor a low fee can definitely guarantee you will pay less overall. When comes to choosing a mortgage borrowers need to do some careful homework and factor in the headline rate, fees, and the overall true-cost of the mortgage.”