Mortgage commission. Is it worth avoiding?

Some of our clients emphasize at the first meeting that they are looking for a mortgage without a booking fee. The booking fee or application fee can be as high as £1,500, and most of us see this as an unnecessary cost that should be avoided at all costs. However, the reality turns out to be a bit more complicated, and in this article we would like to illuminate the subject.

What is a mortgage commission?

In many UK banks, the application fee is charged at the application stage - the fee will be charged regardless of whether the financing decision is positive or negative. Financial intitutions decide on such a step in order to cover the labour costs of risk analysts, who check each borrower for solvency and past behavior.

Can a mortgage lending commission be a good thing?

In preparing the most favorable offers for you, your Extend Finance advisor will take into account several factors. Here is an abbreviated list of them:

Mortgages with commissions tend to have lower interest rates

As a rule, mortgages with a commission feature lower interest rates. This is the practice of many banks, including Nationwide and HSBC. Keep in mind, however, that paying £1,000 in exchange for a 0.1% or 0.2% lower interest rate may not be worthwhile if you are borrowing relatively little, such as £100,000 for 10 years. On the other hand, at 350,000 each 0.1% interest rate translates into £350 per year. Considering that many banks including, for example, HSBC, offer even 0.3% lower interest rates (fixed mortgage for 2 years, LTV 95%) the annual savings from taking a seemingly less profitable product can be as much as the equivalent of this fee.

The lower the interest rate, the higher the amount you can borrow

Sticking to the general rule. that the installment of a mortgage given to you must not exceed your disposable income (income - fixed costs) any reduction in interest rates automatically translates into an increase in your creditworthiness. In our opinion, it’s much easier to raise an extra £1,000 in fees than it is to raise your income or lower your expenses to compensate for the higher interest rate.

An additional advantage of this solution is also that the LTV of your mortgage will fall faster - this is, of course, due to the fact that interest will be a smaller part of the installment. And this will consequently make it easier for you to get a second charge mortgage or make a favourable remortgage.

Getting a mortgage with a commission could potentially be easier

As we have already mentioned, the lower the interest rate on a mortgage, the lower the installment, and therefore the higher the creditworthiness. If you know that your affordability limits you in choosing a property that meets your family’s requirements, choosing a long-term cheaper product is definitely advisable.

When is it a good idea to opt for a mortgage with a commission?

Your Extend Finance credit counselor will provide you with offers that will best suit your needs. However, it is worth knowing what factors we take into account to match you with a product that will meet all your needs. Among the factors we take into account are:

• The amount of the mortgage granted - for amounts at the level of £ 100-150 thousand, the commission will basically never be profitable. However, if you plan to purchase for a larger amount, the situation changes. Usually, with a mortgage sum exceeding 300 thousand, it is worth incurring the cost of the commission;

• Your savings - if you have a very limited amount of funds, it is potentially a better idea to take a slightly more expensive mortgage that you can get now. Continuing to rent means additional costs that won’t be offset by a slightly lower interest rate;

• The length of time for which you want to freeze your interest rate - in the case of fixed-rate mortgages for a period of 5 years, the difference in interest rates may be smaller and it will still be more cost-effective to choose a mortgage with a commission. However, given the Bank of England’s recent decisions, we almost exclusively recommend fixed-rate products for 2 years to our customers;

• Your outlook on moving - while no one can predict the future, some of our customers assume in advance that they will be moving in a few years, for example, with plans to expand their family. Analogous to point three, tying yourself to a property for only a few years makes the benefits of taking a mortgage with a commission smaller.

Application fee a product fee

Let’s point out - application fee is not the same as product fee. In the case of consumer mortgages, you are most likely to encounter the latter fee which, in practice, means that you will only incur the cost when you obtain a mortgage. Application fee is mainly found in the case of buy-to-let mortgages as well as other products dedicated to business customers.

How much is the mortgage fee in the UK?

The amount of fees depends largely on the bank you choose as well as the product you opt for. In practice, the fee for a consumer mortgage ranges from £499 to £1,499, with the most common being an equal thousand. The rates will depend primarily on the LTV ratio, the term of the mortgage agreement and the amount you want to borrow.

Is it better to choose a commission payable in advance or spread in installments?

The answer is relatively simple - if you can afford it, it’s better to pay it upfront. First of all, this will translate into lower mortgage payments, which means a greater level of financial security or the ability to borrow more money to buy a house.

However, if you have limited funds, spreading the commission over installments may be reasonable - for a standard mortgage, and therefore repayable over about 25 years, the product fee will translate into virtually unnoticeable amounts payable each month.

How much can I save by choosing a mortgage with a commission?

Now let’s move on to calculations that, on real numbers, will make you realize the scale of savings generated by choosing a mortgage to which an origination fee will be added. Let’s add that the results can vary dramatically depending on your individual situation, so it’s best if you turn to us directly.

Example 1 - A house worth £280,000, a mortgage with an LTV of 95% and a frozen interest rate for 2 years.

£280,000 is what Nerdwallet reports as the average price of a property in the UK. Using Lloyds Bank as an example, let’s consider two offers for people who have not yet been exposed to the institution - the lowest interest mortgage with a commission and one without one. Both mortgages would be repaid over 25 years.

Mortgage without commission Mortgage with commission Instalment amount £1714 £1672 Interest rate 6,00% 5,74% The amount of commission 0 £999 You can find commission and interest rate data on the official Lloyds Bank website. The figures quoted remain valid as of 07/08/2024

Choosing a mortgage with a commission translates into a £42 lower installment. Over the course of two years, therefore, you will save £1008, so if you plan to switch to another mortgage after that time, it won’t exactly be worth it.

Example 2 - A house worth £375,000, a mortgage with an LTV of 90% and a frozen interest rate for 5 years.

In this case, the property is already clearly more expensive. In order to remain objective, let’s analyze Virgin money’s offer this time.

Mortgage without commission Mortgage with commission Instalment amount £1945 £1918 Interest rate 4,90% 4,76% The amount of commission 0 £995 You can find commission and interest rate figures on Virgin Money’s official website. The figures given remain valid as of 07/08/2024

This time, choosing a mortgage with a commission would save you £27 per month. However, a contract with a fixed interest rate for 5 years would make you pay £1620 less over 60 installments. In this case, it’s definitely worth considering paying a commission.

Summary

As you can deduce, the cost-effectiveness of mortgage offers with a financing fee is not so obvious. In some cases, it’s worth it to opt for such a move, while in others, you’ll save just a few pounds over 2 years. To make sure you make the right decision and pay as little as possible for your home,** contact us - your first meeting with a mortgage advisor doesn’t commit you to anything, and within minutes you’ll know how much you can borrow, how much of a down payment you’ll need to raise, and what to watch out for when you’re looking for your new home.**