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Story for The Times: Borrowers taking big fee loans to reduce rates

Journalist: George Nixon, The Times and The Sunday Times

ended 19. October 2023

Good morning,

After Skipton's new 5% fee mortgage for product transfers came out last week, there's been a lot of chatter about fees in the mortgage market. 

I know BtL loans have had % fees for a while, some as high as 7%, so I'm looking to speak to any clients of brokers where they've decided to take a loan with a much higher fee, ideally a % fee, in order to reduce the monthly payments. 

Also, brokers, even on the resi side where it tends to be £0, £500, £999, £1,500, etc, are you seeing more clients paying fees, even bigger fees, to obtain slightly cheaper rates?

Thanks!

12 responses from the Newspage community

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Ross Lacey
Director & Independent Financial Adviser at Fairview Financial Management
We always look at the most cost-effective option factoring in both the product fee, and the interest rate. Generally, for larger mortgages it tends to make most sense to pay a product fee to secure a lower rate, as the lower rate has a bigger impact on that larger borrowing amount, but everything needs to be looked at on a case-by-case basis. In our experience, most people prefer to add product fees to the mortgage, so they aren't having to find the extra amount up front. Even with doing this, it can still work out lower cost over the relevant period compared to a higher rate deal with no product fee.
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Craig Fish
Director at Lodestone Mortgages
After a full financial assessment, and discussion surrounding the client's needs and aspirations, the search for a suitable product will commence. The key to this is how we source as per an FCA requirement to demonstrate the true cost of that mortgage over the term of its initial product. This true cost encompasses all the monthly payments and any lender arrangement fees. Therefore despite the recent press about higher lender fees, this is nothing new to brokers. In many cases, a higher rate with a lower fee has an almost identical cost to a lower rate and higher fee product.
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Bob Singh
Founder at Chess Mortgages
As the real effects of the cost of living crisis start to bite over the course of 2024 we will begin to see other lenders take a leaf out of Skipton survival kit and design products to soften the blow as millions come out of ultra low fixed rates.

I urge lenders to direct their clients to seek advice from a qualified adviser so the most suitable product can be recommended for their circumstances. Borrowers need to understand the ramifications of such deal over the long term and good advice is absolutely essential. Clicking a button isn’t advice. This begs the question whether non-advised sales are still fit for purpose.

The mechanism to lower the rate and increase the fee is widely used in the BTL market and it’s just a natural progression for it to move to the residential market.

If we’re not careful some quarters will start to describe lenders as “sharks”

Clear concise advice is key.
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Michelle Lawson
Director at Lawson Financial
As with all, this is about offering options. A good mortgage adviser will compare the costs overall as sometimes it is financially better for a customer to take a lower rate and higher fee and vice versa. It will work for some but not for all. Considerations to take are compounding the fees as adding this will increase the borrowing and to look at the impact of high fees on the overall loan to value of the property and how this can look in the future.
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Simon Bridgland
Director at Charwin Private Clients
Most clients are doing the maths and I find prefer to pay on the higher side of fees because mortgage loan sizes are generally larger. The larger fee is worth paying as even a slight incremental drop in interest rate on a large mortgage can save money, it simply depends on loan size. As an example, a £150k repayment mortgage over 20yrs would cost £1009pm at a rate of £5.24% and no fee, this equates to £36,310 in interest and fees over 5 yrs. Whereas the same loan with a £999 fee would be at 4.98% and cost £988pm and £35,433 in interest and fees over the same 5 yr period, some £877 cheaper for having paid a fee.
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Jack Tutton
Director at SJ Mortgages
The level of the arrangement fees Skipton is charging for these new products are what landlords have had to become used to when financing their mortgages. A lot of landlords have had little choice but to pay significantly higher fees to remortgage to achieve the borrowing amount they require, this has been a particular concern for some as there are some buy-to-let lenders who will not offer their existing customers a retention product.

When it comes to paying an arrangement fee, the client's circumstances and priorities are most important when deciding to pay an arrangement at any level. Education around arrangement fees is very important, client's need to understand the impacts of paying these fees and how it isn't always worth their while paying them to achieve an initial lower monthly payment.
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Graham Cox
Director at Bridging Hub
Higher product fees seem to be the new profit maximizer for lenders, even though lending should be more profitable for them now it's easier to raise funds cheaply through saver deposits.

Of course, human behaviour being what it is, lenders know borrowers are all too keen to bung an exorbitant fee onto the loan. But it can add thousands in additional interest payments over the mortgage term, so borrowers should think carefully before doing so.
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Tom McNulty
Director at Gloucester Mortgage Centre
Despite the criticism it has attracted from some corners, Skipton enabling certain borrowers to pay a higher fee in order to have more affordable monthly payments is an option that a good broker will consider, especially in a cost of living crisis as challenging as the one we're currently in. For some people, the reduced payments that come from paying a bigger fee could make a real difference to their finances.
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Sabrina Hall
Mortgage Adviser & Protection Adviser at Kind Financial Services
As a mortgage adviser, we must work through the numbers on these fees to see what they are costing or saving the client. I've had many cases where a product with a fee looks great but if the fee is £1000 for a 2-year fixed but only saves you £500 over the 2 years then clearly it's a cost to the client. That's not to say that it's wrong for the client but it's about having a full informed choice. If the client's priority is to reduce the monthly payments over and above the overall cost then a client might take a higher fee product however in my experience most clients want the cheapest cost overall and most clients don't want to add a large fee to their balance or pay out a large fee upfront.

We also have to consider that if a fee is added to the balance then interest is payable on the loan over the term of the mortgage which can significantly increase the costs further.
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Scott Taylor-Barr
Principal Adviser at Barnsdale Financial Management
The advice process, in general, is the same in that you are looking at the best overall value for a client throughout the deal period. So, a deal with a high fee is fine, if the rate is low enough to mean the overall cost is lower than a deal with a higher rate, but a smaller or no fee. This usually means that the higher the mortgage balance the more likely it is that a deal with a low rate, but high fee will be the better value option, whereas a client with a smaller mortgage balance will be better served by a deal with a higher rate but low or no fees. The aim is always the overall lowest cost for the client. There will however always be occasions when a client's specific needs mean a different approach is required, which is why any advice should always be tailored to each individual borrower.
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Austyn Johnson
Founder at Mortgages For Actors
With BTL, sometimes we have to recommend the lower rate, higher fee option just to get the loan through the stress tests. Its tough to do, but sometimes when you work out the finances, it actually works out the same. For example, Landbay offer fees and rates on a sliding scale, but by and large, they end up pretty much the same over 5 years. They are a solution to the tougher market and have been helpful at times. Did you know, a lender has also released a 9.99% fee? Imagine that on a £7m portfolio remortgage...
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Rhys Schofield
Brand Director at Peak Mortgages and Protection
There is genuinely a place to pay a fee if a client will save money overall or if they are struggling to make ends meet. Faced with the option of paying a fee or not being able to keep up repayments for the roof over their heads, what option do some mortgage holders have?