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Low mortgage rates: are they worth the initial fees?

By Joel Stanier

19 August2011

Recent research by Moneyfacts.co.uk indicates that the average mortgage arrangement fee has increased by 17% in the last year - adding 151 to the cost of a typical mortgage.

The average borrower now pays an arrangement fee of 1,030 when taking out a mortgage, compared with 879 a year ago. But with many mortgage rates falling in recent weeks, do those lower rates cancel out the impact of a higher up-front cost?

It may make better financial sense than many people realise, says a mortgage expert at Think Money.

"When mortgages with lower interest rates also carry higher arrangement fees, this can make it quite difficult for borrowers to work out how much their mortgage could actually cost them, so it pays to do the maths.

"For example, imagine you're borrowing 150,000 with a two-year fixed rate of 4%, to be repaid over 25 years. Without a fee, your monthly mortgage payment would be 791.76 a month. With a 1,000 arrangement fee, assuming it is added to the mortgage, the monthly payments would increase to 797.03 a month - around 5 more.

"This is the equivalent of raising the mortgage rate to 4.07% - so we can see that paying the arrangement fee for this deal makes more financial sense than, say, a deal with no arrangement fee but a 4.5% interest rate, which would cost 833.75 a month.

"The interest rate makes a much bigger difference to monthly payments than many people realise. In fact, in this example, the borrower could add a fee of up to 7,955 to their 4% mortgage and still pay less each month than if their interest rate was 4.5%.

"This highlights just how important it is to do your calculations before taking out a mortgage. Anyone who doesn't feel confident doing this should ask a mortgage adviser to help.

"However, borrowers must keep in mind that adding an arrangement fee to their mortgage will increase the total amount owed and decrease the amount of equity in their home, which shouldn't be taken lightly.".

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Tags: mortgage rates, mortgages, rates, fixed rate, fixed rate mortgage

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