Online mortgage company mform.co.uk has warned that any perceived saving on not paying upfront fees will be wiped out by the additional interest charged in the long-term.
Lenders are launching mortgages where start-up fees are increasingly added to the mortgage. If for instance a customer applies to borrow £150,000 and arrangement fees are £1,000 the loan becomes £151,000.
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The practice allows lenders to highlight a lower interest rate for the mortgage product while ultimately earning more interest from the borrower by lending them the cash to pay fees.
mform.co.uks analysis shows the effects of adding start-up fees to mortgages. For instance someone borrowing £175,000 with Yorkshire Building Societys 5.59 per cent five year fixed rate would pay £1,048.08 a month for the initial term of the deal.
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However the Yorkshire would charge fees of £3,820 for the mortgage. If the same borrower opted to add the fees to the loan their monthly payments would rise by £59.85 and they would pay £1,508 extra over the term of the deal and still owe most of the money borrowed to pay the fee after five years.
Lenders who tell customers upfront fees are added to the mortgage include Egg which has launched a two-year and three-year fixes at 5.89 per cent. The competitive deals come with arrangement fees of £899 for the two-year and £749 for the three-year. Egg says the arrangement fees will be added to the loan.
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Francis Ghiloni, mform.co.uks Marketing and Business Development Director, said: No one would normally opt to borrow £899 over 20 or 25 years but that is what you are effectively doing if you decide to add the fee to the loan.
Of course for many of us finances are stretched when moving house or remortgaging and so it can be tempting to just add fees to the loan in order to save some cash.
Where possible the advice should be to pay the fee upfront as that will prove to be a better deal in the long-term. Of course if lenders didnt load mortgages with confusing fees and were more upfront about the true cost of a loan the problem wouldnt arise in the first place.
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