A fee-free deal may cost more per month to begin with, but it could save homeowners thousands of pounds over the course of the mortgage - especially for smaller mortgages of £150,000 or less.
To put this into perspective, Nationwide currently offers a remortgage deal at 2.54% with an arrangement fee of £900. Based on a £100,000 mortgage over 25 years, the monthly payments would come to £454.37. Adding the fee to the mortgage would increase the monthly payments by just over £4 (to £458.46).
This may look like a small difference, but if the borrower pays a £900 fee to remortgage every two years, they would end up borrowing an additional £10,800 overall.
By comparison, choosing the equivalent fee-free deal with a rate of 2.94% would increase the monthly payment by £25.28 (to £479.65) - the equivalent of paying £7,584 in fees over 25 years. In other words, paying the higher interest rate but no fees would save the borrower more than £3,000 over the duration of the mortgage.
Colin Mason of Ocean Finance commented:
"Mortgage deals with low interest but high arrangement fees may look tempting, but they can cost a lot more in the long run.
"Borrowers who add the arrangement fee to their mortgage are effectively 'borrowing back' some of the money they've already paid, which means they may end up paying significantly more in the long term.
"The lesson here is that it's worth choosing a deal with higher monthly payments if you know it will save you money in the long run. If you're not sure, ask a mortgage adviser."
