Adding fees to low rate mortgage better short term than no-fees higher rate?

Grez

I'm a first time buyer and I have been speaking to London & Country broker to try and find the best deal. The reccomendation they have come back to me with is with Nottingham BS. The deal is a 3yr fixed rate at 5.79% with no arrangement or booking fee. The broker explained to me that there is also a deal with the same lender at 5.39% but with £195 booking upfront and £500 arrangement fee. He then said the reason they are reccomending the higher rate over the lower is that the cost over 3 years at the higher rate is still less than the cost at the lower rate + the fees.

However having read the details on Nottingham's website, I see that the £500 arrangement can be added to the mortgage. Since this is then spread out over the whole term of the mortgage rather than just over the 3 years, it seems to me with some rough calculations that in terms of the lowest monthly payment and 3 year cost it's actually better to go with the lower rate + fees added to the mortgage. I realise I am paying the interest on the £500 but my main priority is to lower the initial monthly payments as much as possible. Can anyone tell me whether this makes sense or have I completely missed something?

WestonDave

It really depends on the amount of the mortgage and how much the fees are. If you calculate 3 years interest on your chosen amount at both rates, and then the difference between them - if the difference is greater than £695 then its better to pay the fees and get the cheaper rate. Looking at these figures I suspect you'd need to borrow less that £58k to make it worth having the higher interest rate and avoiding the fees. Given that you are FTB'ing and you wouldn't get a shed for £58k, I suspect the advisor is right but do your own figures for peace of mind.

Grez

Well here are my sums, I'm looking to borrow £72000 over 35 years, so I've added the £500 into the lower rate one.

72500 over 35 years at 5.39% = £384.13 /mo * 36 months = £13828.68 over 3 years, plus 195 upfront = total £14023.68

72000 over 35 years at 5.79% = £400.43 /mo * 36 months = £14415.48 over 3 years, no other fees = total £14415.48

So to me that looks like I'm saving just shy of £400 over 3 years by paying the fees but adding them into the mortgage.

I used the FSA calculator to work out the monthly payments.

Dranny

I'm in pretty much the same situation, deciding whether to pay up front or add fees to my loan.

Fees are about £600 - and the monthly payments on a 5 year fix works out at about £4 difference per month.

Over the 5 year piece there's roughly £250 of a difference (add fees = £250 more), so basically by adding the £600 to the mortgage, I pay £350 less overall.

Very brain meltingly strange, but I'll take it.