Rates v fees: Should you ever pay a whopping fee for your mortgage?

In order to get the lowest rates on your borrowing the chances are you'll have to pay a jaw-dropping fee, with application fees hitting £2,500 in some cases.

This can be a bitter pill to swallow, particularly if you are only signing up for a deal that lasts a couple of years: it won't be long until you're remortgaging again and coughing up yet another fee for another loan.

However, over the duration of a mortgage, if the expensive fees secure you much more competitive interest rates, they could save you thousands of pounds over the long run. Also, they can often be added onto the mortgage so you won't always have to shell out upfront - the downside of course is that you will then pay interest on the amount. If you are using a broker, ask them to help you crunch the numbers to see if the rate is worth the price.

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Is the mortgage worth the price?

So are the fees worth it? Do you shell out for a big fee to bag a low rate or do you go for a deal with a higher rate but a more affordable fee?

While some fees can be as much as £2,000 or £2,500, these do tend to be reserved for the lowest rate deals. A typical fee on a mortgage is likely to be closer to £1,000, some may only charge £100-£200 but the rates aren't likely to be nearly as competitive.

David Hollingworth, spokesman for broker London & Country Mortgages, says it is important to consider both the rate and the fee you are being asked to pay: "Just focusing on rate won't serve you well."

The right decision for you will depend on two things: the size of your loan and the length of the deal.

"A bigger mortgage will justify a larger fee," he explains "a longer scheme period also helps."

So while it may make sense to pay a big fee on a large loan over five years, if you have a smaller debt and are looking at two-year deals it may be more sensible to plump for the higher rate that doesn't carry such a punitive application fee. 

Do the maths

While a broker can certainly help you strike the right balance between fee and rate, you can easily do the maths yourself. Simply tot up the total value of your monthly repayments as well as the value of all the fees you are paying and divide that figure by the number of months your deal will last. Do this for each of the deals you are considering and you'll quickly be able to see which offers the best value for money.

Stump up the cash

Whether you go for the low rate with the high fee, or go for a higher fee with a more moderate application charge, Hollingworth stresses it pays to stump up the cash there and then. "People do add their fees to their loan but then you end up paying interest on the fee for the rest of the term."

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