Getting a good mortgage deal could save you thousands of pounds, but slap mortgage fees on to your mortgage and you’ll be undoing your hard work at the last minute.
With interest rates at a record low over the last 2-3 years, banks have had to find other ways to make extra profits from their mortgage customers.
As a result, mortgage fees have steadily been climbing year on year and can now easily run into the thousands rather than the hundreds of pounds.
To compensate for this, your prospective mortgage provider is likely to ask if you would like to defer the payment of your mortgage fees and instead add them to your mortgage.
This is supposedly so that you can spread the repayments rather than having to stump up the cash when money is already likely to be tight.
However, although this may seem like a bargain deal, adding your fees onto your mortgage could end up being an expensive mistake; here’s why...
It will cost you more
The main reason that you should avoid adding fees to your mortgage balance is that you will end up paying more overall.
Banks that allow you to add your fees to your mortgage don’t do so through the goodness of their hearts, instead it’s simply another way of boosting their profits and making you pay more.
Because fees are added onto your mortgage balance they accrue interest at the same rate as the rest of your borrowing.
Over the course of your mortgage term this additional interest can mean that the amount you pay in fees could almost double.
Find out the facts of the matter
If you are unsure exactly how much adding fees to your outstanding mortgage will cost you in interest then you can request an illustration from your mortgage provider.
They should be able provide two illustrations of what your monthly repayments would be with and without the mortgage fees and clearly state exactly how much interest you’ll be paying should your mortgage stay at the same interest rate.
You should also check if you are tied in to repay your fees over a fixed term or whether if you add them you would be free to pay them off at any point at no extra charge.
If you find that you would be tied in this would mean that you are essentially agreeing to pay the extra interest for the full term as soon as you add them to your mortgage.
I don’t have any spare cash what other choice do I have?
Finding an extra £1000 for mortgage fees when money is already tight can be difficult, especially if you have used all your savings to use as a deposit, or to pay for solicitor’s fees.
If you don’t have thousands spare in your savings you need to work out just how quickly you can realistically repay your fees and what it will cost you in interest.
A credit card which offers 0% on purchases would be one way to spread the cost without paying extra for the privilege, although you would have to make sure that your repaid the balance before the end of your 0% period ends or your could start accumulating interest faster than through your mortgage.
Either during your initial application or during your mortgage completion you should be given the option of how you’d like to pay your mortgage fees, at this stage you should be able to specify that you’d like to use a credit card.
However, you should also check that your transaction would be classed as a purchase rather than a money transfer or the transaction may not be entitled to receive the 0% interest rate.
If you find that you don’t have time to apply for a 0% card, or don't want to apply for another financial product why your mortgage appliation is going through there is another option.
You could use an existing credit card to pay the fees up front and move the balance to a 0% balance transfer card (either via a balance transfer or a money transfer) at a later date to keep interest payments down.
Before deciding on which option to take you need to compare exactly what you would pay in balance transfer fees and interest charges to decide if it’s worthwhile.
Whether you decide to temporarily add fees on to your mortgage or to use a 0% credit card to spread the cost you should work out how much you can repay each month and treat paying off the fees like loan installments so that you clear this additional borrowing as soon as possible.
Under what circumstances should you add the fees?
If you don’t have spare cash or savings available to pay the fees up front or access to low interest credit then you may have to consider adding your fees to your mortgage.
Doing this is better than paying for the fees on an expensive credit card or applying for a separate loan, this is because in almost all cases mortgage interest rates will be lower than what you can expect to pay for a loan or a credit card.
However, if you do decide to do this, check if you can pay off the fees earlier by making overpayments, (this is often the case even if you can’t overpay your actual mortgage), to reduce the overall cost.
Consider the fees before you buy
Given their rise in cost over recent years it has become more important than ever before to consider the fees you’ll have to pay for your mortgage before you sign the paperwork.
If you are faced with hefty application and completion fees, you may be better off opting for a mortgage with a slightly higher interest rate and no fees, especially if you are going to have to add the fee to your mortgage. However, you still need to be careful not to sacrifice short term gain for long term expense.
The important thing you need to check is the total cost to see which works out cheapest over the full term of your mortgage. Compare exactly how much you’ll pay for a higher APR mortgage with no fee to the lower APR mortgage with your fees attached.
Doing this should help you see which will work out cheapest over the course of your mortgage.
If you’re looking for a new mortgage read our guide, 10 Steps to Your Perfect Mortgage, or if you are re-mortgaging take a look at 5 Things You Need to Know Before You Remortgage.
Alternatively why not try following our Action Plan: How to get the best mortgage deal, which is crammed full of resources and tips to help you find the mortgage that best suits your needs.
