Why you should pay mortgage costs upfront

Adding the product fee onto your mortgage may seem like a good idea, but it could cost you a lot more in the long run.

When it comes to buying a home - especially your first home - I'm sure you'll be keen to keep the costs down as much as you can.  

What you need is something which makes the whole house-buying a process a little lighter on the pocket. For instance, you might get a helping hand if your mortgage lender will allow you to add the mortgage product fee onto your loan, instead of paying it upfront.

But, don't forget, some lenders will demand the fees are settled up in advance, so I'm afraid you won't always have the luxury of a choice.

The fee for arranging your mortgage could easily run to £1,000 or more. So, if you're a bit short on ready cash and your lender will let you pay later, you'll be thanking your lucky stars! Or, will you?

It might sound tempting, but the bad news is you'll have to pay interest on the fee until your mortgage debt is repaid.

So, if you can't decide whether to pay now or later, let's take a look at the real cost of adding the fee onto your loan:

Buy now, pay later

Repayments are based on a mortgage of £150,000 over 25 years. Interest rates are assumed to stay the same throughout.

Let's assume the product fee for your mortgage is a fairly typical £1,000. If your mortgage interest rate during the term was 5%, the fee would actually end up costing you £1,773 in total over 25 years. However, if your mortgage rate was higher at 6%, the fee would set you back £1,956, once interest had been added on top. That's almost double the original fee!

It looks like pretty poor value for money to me.

If you can afford the fee, then there really is no contest. It makes far more sense to pay it upfront, rather than pay for it twice during the term of your mortgage.

What happens if you can't afford the fee now?

Of course, if money really is tight it could be a case of Hobson's choice. But don't panic. After all, there's no real difference in paying the fee now and putting down a slightly smaller deposit. Or, paying the fee later and putting down a slightly larger deposit. It all pretty much comes down to the same thing.

That said, you may prefer to add the fee onto your loan, so you can pay the healthiest deposit you can, putting yourself in the best shape as a borrower. You may even decide it's worth paying a little extra each month, so you can spread the cost of the fees over time in a more affordable way.

Think about overpaying

Remember, when your finances are a bit more robust, you can cutback the amount of interest you owe by overpaying your mortgage. By clearing your loan sooner, rather than later, you can easily offset the extra expenditure you would have otherwise shelled out on the product fee.

Don't pay now or later!

But if paying a product fee is still proving to be a real headache, you may be able to get around it completely by applying for a fee-free mortgage instead. After all, buying a home is an expensive business with stamp duty, survey fees, legal fees and moving costs to contend with. Skipping the product fee may just be the answer to your prayers.

Mind you, I urged caution on fee-free deals in my recent article Don't be swayed by a fee-free mortgage. My concern is that borrowers could be duped into paying more expensive rates because fee-free loans are seemingly lower cost.

That's not to say some fee-free deals don't offer good value. It's all about the sums. A fee-free may prove cheaper than a deal where you add the fees to the mortgage, even though it doesn't offer the lowest rate. If you're in any doubt, speak to a broker who can compare the costs of the deals for you. And take a look at Don't dismiss fee-free deals for a range of mortgage products which promise a killer combination of no fees and pretty competitive rates.

Just bear in mind that, if you add your fees to your mortgage, you'll avoid a huge upfront bill now - but you will end up paying for it later.,

You can get advice on the best deal for you from our lovemoney.com mortgage brokers.

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