If you are taking out a large mortgage then comparing both the interest rate and the arrangement fee associated with the deal is essential. Unlike small mortgages, it can often be beneficial to pay a substantial arrangement fee on a high net worth mortgage to benefit from a lower interest rate.
New research has found that while banks and building societies offer similar mortgage deals, arrangement fees charged by banks are, on average, over £700 higher than building society fees. We examine large mortgage arrangement fees and explain why paying a higher fee may be beneficial.
Paying a high arrangement fee could save you money
New research from financial comparison website MoneySupermarket.com has found that while the average two-year fixed-rate mortgages from building societies and banks are similar (4.15 per cent and 4.22 per cent respectively), there is a big difference between the arrangement fees attached.
Overall, building societies offer much lower arrangement and booking fees thank banks. On similar rates, this could help to save over £700 over the term of the mortgage deal. And, it is a similar story with five-year fixed-rate mortgages. Although banks are offering a lower average interest rate at 4.62 per cent when taking into account the higher fees, consumers could be saving more than £200 if they went with a building society.
The difference between the top rate for a two-year fixed mortgage with a 90 per cent loan-to-value (LTV) from First Direct and Chelsea Building Society is 0.2 per cent but when the fees are factored in, there is an overall saving to be made of £1,000 by going with First Direct.
However, this is only true on a mortgage of under £500,000. If you want a large mortgage in excess of £500,000, you would actually be better going for the lower rate deal and paying the higher fee.
The Daily Telegraph says that ‘to find the best deal, it is essential that borrowers crunch the numbers based on individual circumstances.’
Clare Francis, mortgage expert at MoneySupermarket.com, said: “When comparing mortgages you need to calculate the total amount you'll pay over the term of the deal – monthly repayments plus fees – in order to work out which will be the best value for you."
Islay Robinson, director of London mortgage advisor Enness Private Clients, says that it is important not to rule out products with a high arrangement fee when taking out a large mortgage. He said: “If there is no difference between the interest rate on offer then this research suggests that a building society may offer better value than a bank in terms of the associated fees.
“However, we often find that our high net worth mortgage clients take out deals with significant arrangement fees. On a £1 million home loan, a 0.1 per cent lower interest rate represents a £5,000 saving on a five year fixed rate deal.
“So, if we can secure a five year fixed rate for high net worth client at a deal that is 0.5 per cent lower than they can find elsewhere, even if they have to pay a higher fee they will save £25,000 in interest over the five years.”