This Common Product Fee Mistake Can Cost You Thousands

As a mortgage broker, I know full well lenders want to make money. With many lenders now offering extensive product ranges, with and without fees this is another way, with powerful psychology that lenders end up getting you to unknowingly pay more on your mortgage

Let’s take an example:

Term: 20 years

Balance: 200k

Product length: 2 years

Lower rate: 4.10% with a £995 fee

Higher rate: 4.36% with no fee

This would Produce Monthly Payments:

4.36% no product fee: £1,250

4.10% 995 fee added to the loan: £1,229

4.10% 995 fee paid up front: £1,223

It’s at this point where many people make a mistake as they calculate it in the following way:

4.36% — No product fee | Monthly Payment: £1,250 | Total Over 24 Months: £30,000

4.10% — £995 fee added to loan | Monthly Payment: £1,229 | Total Over 24 Months: £29,496

4.10% — £995 fee paid upfront | Monthly Payment: £1,223 | Total Over 24 Months: £29,352

From this it seems that adding the fee to the loan would be most cost effective when in fact this can end up charging you the most interest. 

To work out the true cost we need to calculate over the entirety of the mortgage term, taking in to account a reversion to the no fee rate once the product expires. Here are the figures accordingly:

As consumers we get drawn in by the lower monthly payment of adding the fee to the loan, overlooking the fact we will be charged interest on a higher balance for the entirety of the mortgage term- what we thought was saving money, ends up costing over £2000 more!

Key Takeaways

• Lower monthly payments don’t always mean lower total cost-adding a product fee to your loan increases your balance, so you pay interest on it for the entire mortgage term.
• Short‑term comparisons can be misleading