How to Understand Mortgage Product Fees as a First-Time Buyer

Mortgage product fees for first-time buyers can make comparing deals more complicated than simply looking for the lowest interest rate. A mortgage with a lower rate may have a significant product fee, while another deal could have a slightly higher rate but little or no product fee.

The important point is that the interest rate and fee should not be considered separately. The amount you are borrowing, the length of the initial deal and how the fee is paid can all affect which mortgage costs less over the period you expect to keep it.

For a first-time buyer, understanding these costs can make mortgage comparisons much clearer before an application is made.

What Is a Mortgage Product Fee?

A mortgage product fee is a charge attached to a particular mortgage deal. It may also be described by a lender as an arrangement fee, completion fee or product charge.

Not every mortgage has one. Some products are advertised as fee-free, while others can have fees running into hundreds or more than a thousand pounds. The precise amount depends on the lender and mortgage product.

A product fee is separate from the deposit. It may also be separate from other home-buying expenses such as legal work, surveys and any valuation costs.

If you are preparing for your first purchase, we cover the wider process in our guide to first-time buyer mortgages.

How Do Mortgage Product Fees for First-Time Buyers Work?

Mortgage product fees are usually either paid separately or, where the lender permits it, added to the mortgage balance. Each option has different implications.

Paying the fee separately means finding the money alongside your deposit and other purchase costs. Adding it to the mortgage can reduce the amount of cash needed upfront, but it normally means paying interest on that fee while it remains part of the mortgage balance.

For example, if a product has a £999 fee and that fee is added to the loan, the mortgage balance increases by £999. Interest is then charged on the increased balance according to the mortgage terms.

Is a Fee-Free Mortgage Better for a First-Time Buyer?

Not automatically. A fee-free mortgage can reduce upfront costs, which may be attractive when savings are already being used for a deposit, legal costs and moving expenses. However, the mortgage rate may be higher than on an alternative product carrying a fee.

The more useful comparison is therefore the overall cost over the relevant period rather than the fee alone.

A fee-free product could work out cheaper for one borrower while a fee-paying product could cost less for another. Loan size can make a significant difference because even a small rate difference has a greater cash effect on a larger mortgage.

Why Can a Lower Mortgage Rate Have a Higher Product Fee?

Mortgage products are priced in different ways. One lender may offer a lower interest rate alongside a larger upfront fee, while another may offer a higher rate with a smaller fee or no product fee at all.

This is why choosing a mortgage solely because its headline rate is lower can give an incomplete picture.

Imagine two mortgages. One has a lower interest rate but a £1,499 product fee. Another has a slightly higher rate but no product fee. The first is not automatically cheaper simply because its rate is lower. The difference in monthly payments needs to be considered against the additional £1,499 cost.

How Can You Compare a Mortgage Rate and Product Fee?

A useful starting point is to compare the total cost during the initial product period. This can include the monthly mortgage payments, relevant product fees and other charges directly associated with each deal.

Suppose a fee-paying mortgage saves £30 a month compared with a fee-free alternative. Over a two-year initial period, that represents £720 in monthly payment savings. If the lower-rate mortgage carries a £999 fee, the monthly saving alone would not recover the full fee during that period.

This is deliberately a simplified example. Mortgage balances reduce over time, interest calculations differ and other costs or incentives may apply. A regulated mortgage adviser can provide a personalised comparison based on actual products and circumstances.

Does Mortgage Size Affect Whether a Product Fee Is Worth Paying?

Yes. Mortgage size can substantially change the effect of a lower interest rate, which is why product fees need to be viewed in relation to the amount being borrowed.

On a relatively small mortgage, a large fixed product fee can represent a significant proportion of the borrowing. The savings produced by a slightly lower interest rate may take longer to offset that fee.

On a much larger mortgage, the same difference in interest rate affects a greater balance. That can make the lower-rate product more valuable, although the complete cost still needs to be calculated.

You can learn more about how loan size affects repayments in our guide to mortgage monthly payments and borrowing amounts.

Should You Add a Mortgage Product Fee to the Loan?

Some lenders allow a product fee to be added to the mortgage rather than paid upfront. This can preserve cash for other purchase costs, but the fee then becomes part of the amount owed.

That means interest can be charged on it. If the fee remains within the mortgage for a long period, the eventual cost can be greater than the original fee.

There can also be affordability and loan-to-value considerations. Adding a fee increases the mortgage balance, so the effect depends on the lender’s criteria and the structure of the application.

What Is a Mortgage Booking or Application Fee?

Some mortgage products can have additional charges besides the main product fee. These may include booking, application or administration charges, depending on the lender.

It is important to establish whether a charge is refundable and when it becomes payable. A fee paid early in the process may be treated differently if a purchase falls through or an application does not proceed.

The mortgage documentation should explain the relevant charges and their treatment. Where anything is unclear, it should be checked before committing to the product.

Are Valuation Fees the Same as Mortgage Product Fees?

No. A valuation fee and a mortgage product fee serve different purposes.

A mortgage valuation is generally carried out for the lender so it can assess whether the property provides acceptable security for the proposed loan. Depending on the mortgage product, a basic valuation may be included without an additional charge or a fee may apply.

A lender’s valuation should also not automatically be treated as the same thing as a more detailed survey commissioned for the buyer’s benefit.

What Other Mortgage Costs Should a First-Time Buyer Consider?

The product fee is only one potential cost of buying a home. First-time buyers should consider the wider transaction rather than allocating every available pound to the deposit.

Depending on the purchase and mortgage, costs can include conveyancing, surveys, removals, mortgage-related charges and other property transaction expenses.

Keeping money available for these costs can be important because using additional borrowing to cover unexpected expenses could affect affordability or the financial position shown during the mortgage process.

Our first-time buyer guide explains the wider application and purchase process in more detail.

What Does APRC Mean on a Mortgage?

APRC stands for Annual Percentage Rate of Charge. It is designed to provide a broader indication of mortgage cost by incorporating the interest rate and certain charges under prescribed assumptions.

It can be useful when comparing mortgages, but it should not necessarily be used as the only comparison measure. APRC generally assumes the mortgage follows the stated terms over its full duration, while many borrowers review their mortgage when an initial fixed or other introductory period ends.

For that reason, both the initial product period and longer-term costs can be relevant when comparing options.

Do First-Time Buyer Mortgages Have Different Fees?

They can. Some products designed for first-time buyers may include incentives such as no product fee, a contribution towards certain costs or other features. Availability and criteria vary between lenders and products.

An incentive should still be considered as part of the complete mortgage package. A product offering a useful incentive is not automatically the cheapest if its interest rate or other charges result in a higher overall cost.

Can Your Deposit Affect the Mortgage Products Available?

Yes. The relationship between the mortgage amount and property value is known as the loan-to-value ratio, or LTV. Different LTV bands can have different mortgage products and pricing.

A larger deposit generally means a lower LTV. This may provide access to a different range of mortgage products, although lender criteria and individual circumstances still apply.

For first-time buyers deciding how much cash to put towards a deposit, it can therefore be useful to consider both the LTV and the money that needs to remain available for fees and other purchase costs.

Can Credit History Affect Which Mortgage Fees You Pay?

Indirectly, yes. Credit history can affect which lenders and products are available, and those products may have different rates and fee structures.

An applicant with defaults, missed payments, CCJs or other adverse credit may find that the relevant mortgage products are priced differently from mainstream options. The age, amount and type of credit issue can all be relevant.

This does not mean that a particular fee structure applies to everyone with adverse credit. Lender criteria differ considerably. We cover this subject further in our guides to mortgages with bad credit and individual adverse credit events.

What If You Are a First-Time Buyer With Complex Income?

Product choice can also be influenced by how a lender assesses income. Someone who is self-employed, receives variable earnings or has several income sources may meet the affordability criteria of some lenders but not others.

This can affect the range of mortgage products available for comparison. The cheapest advertised product is only relevant if the applicant meets that lender’s criteria.

For example, self-employed applicants can be asked for tax calculations, accounts and other evidence of earnings. Our guide to first-time buyer mortgages for self-employed applicants explains some of these requirements in more detail.

What Should First-Time Buyers Compare Before Choosing a Mortgage?

Rather than focusing on one number, a mortgage comparison can consider the interest rate, product fee, monthly repayments, initial deal period and any relevant incentives or additional charges.

It is also important to consider what happens when the initial deal ends and whether early repayment charges or other conditions apply during the product period.

The mortgage must also be suitable for the applicant’s circumstances and meet the lender’s eligibility and affordability requirements. A cheap headline rate has limited value if the applicant does not meet the criteria for that product.

What Is the Most Important Thing to Remember About Mortgage Fees?

The lowest fee is not necessarily the cheapest mortgage, and the lowest interest rate is not necessarily the cheapest mortgage either. The figures need to be considered together.

For a first-time buyer, this is particularly important because upfront cash may already be stretched between the deposit and the costs of purchasing and moving into a property.

Mortgage Bridge is a mortgage introducer rather than an advice provider. If you need a recommendation based on your deposit, income, credit history and intended mortgage amount, personalised advice should come from a regulated mortgage adviser.

Frequently Asked Questions About Mortgage Product Fees

Do all mortgages have a product fee?

No. Some mortgages have product or arrangement fees, while others are available without one. The interest rate and other features may also differ, so the overall cost should be compared.

Is it better to pay a mortgage fee upfront?

Paying a fee upfront avoids adding that amount to the mortgage balance. Where a fee is added to the mortgage, interest can normally be charged on it. Which approach is appropriate depends on individual circumstances.

Is a fee-free mortgage cheaper?

Not necessarily. A fee-free mortgage may have a higher interest rate than an alternative product. Mortgage size and the length of the initial deal can affect which option costs less overall.

Can I add a mortgage product fee to my mortgage?

Some lenders allow this. Adding the fee increases the mortgage balance and can mean paying interest on the fee, subject to the lender’s criteria and mortgage terms.

Should a first-time buyer choose the mortgage with the lowest rate?

Not based on the rate alone. Product fees, monthly payments, incentives, initial deal length and other relevant charges should also be considered when comparing mortgages.

This guide provides general information only. Personalised mortgage advice should always come from a regulated mortgage adviser.