No fee mortgages
Whether you’re buying a new home or switching your deal, mortgage fees are a fact of life, from arrangement fees, to broker, valuation and legal fees. However, it is possible to avoid some of them. You just need to make sure you don’t end up paying more in the long run.
When it comes to no-fee mortgage brokers, it’s important to understand the ways brokers get paid and the different types of brokers to make sure you choose the right one for you.
And when you’re choosing a mortgage deal, a loan without an arrangement fee won’t necessarily be the cheapest overall so you need to look at all the costs involved before choosing one.
Some lenders will also pay the valuation fee on your behalf but, again, you should look at the deal as a whole to decide whether it’s good value.
Fee-free mortgage brokers
Mortgage brokers help you find the right mortgage. There are a number of ways they get paid for their services, with some charging a fee:
They charge you a fixed fee upfront, which could be around £500
They charge you a percentage fee based on the amount you are borrowing. This can be from 0.3% to 1%, so you could pay from £600 to £2,000 for a £200,000 mortgage
They charge you an hourly rate based on how long they spend dealing with your application. In this case, they should let you know how much you could end up paying
They don’t charge you a fee but get paid by getting commission from the lender for introducing you as a customer. They may get around 0.35% of the size of the loan, which would be £700 on a £200,000 mortgage
They charge you a fee and get commission from the lender on top
Brokers must tell you upfront how they will get paid and provide you with information about their service, including whether they can offer mortgages from the whole market or whether they only arrange mortgages from certain lenders or ranges.
In some cases, the broker might ask you to pay a fee if the lender they are recommending doesn’t pay commission. This could turn out to be better value than choosing a different lender that does pay commission to avoid a broker fee.
Whether a broker charges a fee or gets commission or both shouldn’t affect the mortgage advice they give you or the product they recommend.
Should you use a fee-free mortgage broker?
Paying a fee for mortgage advice could be worth it as the money you save on getting a better mortgage deal or avoiding failed transactions could more than make up for it, but many people prefer not to pay a fee as there are already many other costs involved when you’re buying a home or remortgaging.
You can choose to add any fee you pay to your mortgage but you will end up paying interest on it for the life of the loan.
However, whether a mortgage broker charges a fee or not shouldn’t be the only consideration when you’re selecting which broker to use. Other things to check are:
Whether they are registered with the Financial Conduct Authority, as mortgage brokers must be regulated. Visit its register online to find out
What qualifications they have
What types of mortgages they are experienced in dealing with
Whether they are a member of the Association of Mortgage Intermediaries. This isn’t essential but shows they are more involved in the industry
Whether they are independent and can recommend mortgages from the whole market or whether they are restricted to certain lenders’ products. Lenders themselves must usually offer advice if you go directly to them – if you go to your own bank or building society, for example. This tends to be free but they will only advise on their own products.
It is possible to get a mortgage from some lenders without advice, known as ‘execution only’, in some cases but they must let you know what protections you’re giving up as a result
How you will be able to deal with the broker – will you be able to see them in person or will the service be carried out over the phone or by email only?
If they do charge a fee, that you won’t have to pay it if your mortgage falls through
Reasons to use a mortgage broker
When you’re getting a mortgage, using a mortgage broker is a good idea for a number of reasons.
Firstly they will be able to recommend deals that best suit your needs based on factors such as how much deposit you have, whether you want a fixed or variable interest rate, your income and outgoings, and your credit history.
If they are an independent adviser they can look at the whole market to find you the best mortgage deal. Note that some lenders don’t offer their products or certain deals through brokers, although some brokers may still consider them.
This is particularly useful if you have an unusual situation or you have had credit problems in the past, as they will know which lenders are most likely to lend to you. Being turned down for a mortgage can damage your credit score. A broker will have access to exclusive deals not available direct from the lender, as well as to lenders that only lend through brokers.
They will help you with the mortgage application process, which can be complicated and requires you to provide a range of documents to the lender to prove your suitability for a loan. Using a mortgage broker can help to ensure the process goes smoothly as they will know from the outset what you need to provide and handle much of the paperwork. This could reduce some of the stress involved and result in a quicker decision from the lender.
Another benefit is that if you later find you received poor mortgage advice, you can complain to the Financial Ombudsman Service if the broker doesn’t deal with your complaint in a satisfactory manner. You’ll also be protected by the Financial Services Compensation Scheme if the company goes bust and can’t pay you compensation for financial loss.
They can advise you about other financial products you might need when you take out a mortgage, such as life insurance, income protection insurance and buildings and contents insurance. However, make sure these are products you really need and that you are getting a good deal compared to others on the market.
How to find a mortgage broker
Ask for personal recommendations from family and friends or search for mortgage brokers using Unbiased.co.uk and Vouchedfor.co.uk.
Be wary about using your estate agent’s in-house mortgage broker. Some estate agents have been known to pressurise home buyers to use theirs by telling them they will have a better chance of securing their chosen property, but estate agents should not penalise you if you don’t. You may also not get the best deal if the broker doesn’t cover the whole market.
Fee-free mortgages
There are a range of set-up fees you might have to pay when you take out a mortgage but not all deals have them. The main ones are:
Arrangement fee – this is the fee you pay to the lender for setting up the mortgage and may also be known as a product fee or completion fee. This can be up to £2,000.
If you don’t have the cash to pay for it upfront you can add it to your mortgage but this should be avoided as you’ll have to pay interest on it over the whole mortgage term
Booking fee – sometimes you’ll be charged a separate booking fee when you apply for a mortgage, which can be up to £500
Valuation fee – the lender will want to value the property you are buying or remortgaging to make sure it’s worth enough to provide security for the loan. This usually depends on the purchase price or value of the property and could be £150 to £350 for a £200,000 home. Some deals include free valuations.
You can also often pay extra to have a Homebuyer survey carried out at the same time to tell you about the property’s condition, which could double the fee. If you want a full building survey you’ll usually have to arrange this yourself
Mortgage account fee – this might be charged for setting up and managing your account and could be up to £300
Other charges could include a transfer fee for the lender to send the money to your solicitor, a higher lending charge if you’re borrowing a high proportion of the property’s value, and a fee for arranging your own building insurance rather than taking out the policy offered by the lender.
When you switch your deal to a new lender or pay off your mortgage, your lender might also charge a fee for closing your mortgage account. If you’ve already paid a mortgage account fee you probably won’t have to pay this.
Should you take out a fee-free mortgage?
How much you end up paying for your mortgage overall depends on the interest rate as well as the fees involved so you should take it all into account when comparing the cost of deals. No or low fees don’t necessarily mean you’ll pay less overall as the interest rate might be higher than on a deal with more fees.
Lenders entice you to take out a mortgage with them by offering you a cheaper rate at the start – usually for 2 to 5 years – after which the rate reverts to their higher standard variable rate. Most people switch to a new deal at this point as early repayment charges no longer apply.
For this reason, you should look at the total cost of deals over the initial period, which includes your repayments and the fees. Many mortgage comparison sites show this calculation or you can work it out yourself by adding up the total repayments over the deal period plus the set-up fees.
Bear in mind that if your initial deal is a variable rate it could go up or down during this time but as all variable deals tend to roughly follow the Bank of England base rate this is still a helpful way to compare them.
For example, you could pay an interest rate of 1.84% on a 5-year fixed rate mortgage for £125,000 with an arrangement fee of £995 and pay a total of £32,233 over the deal period. However, another deal with no arrangement fee has an initial rate of 2.39%, which would cost you £33,252 – more than £1,000 extra over five years.
Mortgages must be displayed with their APRC (annual percentage rate of charge) to help you compare their overall cost. While this also takes into account the interest rate and fees it assumes you’ll have the mortgage for the whole term so is less helpful than comparing the total cost over the deal.