Is the mortgage market turbulence getting you down? Have you got a mortgage-related question you need answering? Email in and we’ll get one of our experts to reply. Nick Mendes, mortgage technical manager at John Charcol, has given his advice to a reader below. If you have a question for our experts, email us at money@inews.co.uk.
Question: I’m getting a mortgage of £180,000 on a £200,000 property. The rate I have secured looks good – it’s around 4.8 per cent over five years – but it comes with a hefty £1,499 fee. How important is the fee when getting the loan? Is it worth going for a worse rate with a lower fee?
Answer: Congratulations on securing a mortgage offer of £180,000 on a £200,000 property. This is with an appealing interest rate of 4.8 per cent over five years – I assume it’s the deal from HSBC.
It’s understandable to question the product fee of £1,499, which is on the higher end. You may be considering whether going for a lower £999 fee or a fee-free option from Virgin Money at 4.89 per cent might be a better choice. The product fee raises several important questions that need careful consideration.
Firstly, the importance of the fee cannot be understated when obtaining a loan. The upfront fee of £1,499 will add to the overall cost of your mortgage. It is essential to evaluate whether the lower interest rate, despite the fee, will save you more money in the long run compared to opting for a higher rate – which of course means higher monthly payments – with a lower or no fee.
To determine if a higher rate with a lower fee might be more advantageous, you need to look at the overall cost of the mortgage over its term. Taking into consideration the following scenarios: HSBC’s 4.8 per cent interest rate with a £1,499 fee, and Virgin’s 4.89 per cent interest rate with no fee. Both are five-year fixed rates over a 25-year term, allowing you to compare the total interest paid and add any fees to the total cost.
With HSBC, the annual interest at 4.8 per cent on a £180,000 mortgage amounts to £8,640. Over five years, this totals £43,200 in interest payments. Adding the £1,499 fee brings the total cost to £44,699.
By contrast, Virgin Money’s offer at 4.89 per cent results in an annual interest payment of £8,802. Over five years, this totals £44,010 in interest payments, with no additional fee.
Comparing these scenarios, the Virgin Money option, despite the higher interest rate, costs £689 less over five years than the HSBC option, for your specific borrowing amount. The comparison will of course be different for different people.
Understanding why lenders charge fees is also crucial. Lenders impose fees to cover administrative costs, such as processing paperwork and conducting credit checks. These fees also enable lenders to offer more competitive interest rates; by charging a fee, they can provide a lower rate and receive a portion of the funds upfront to utilise elsewhere. Additionally, fees can serve as a risk management tool, helping lenders offset the risks associated with providing the mortgage.
Utilising a mortgage broker can significantly enhance your decision-making process. Brokers possess extensive knowledge of the market and can find deals that best suit your needs. They save you time and effort by handling the paperwork and application process. Additionally, brokers often have access to exclusive deals not available to the public and can provide personalised advice based on your financial situation and goals.
When choosing a mortgage, it’s vital to look beyond just the interest rate. Consider the fees, your financial situation, and the total cost over the mortgage term. Always run the numbers to ensure you’re making the most cost-effective decision.
Maurice Saatchi: I used to adore capitalism – then I had lunch with Margaret Thatcher