Fees included or paid up front, what's the difference

barryireland

I've often read advice suggesting that one shouldn't get the fees added to the loan, but that one should endeavour to pay them out of one's own money.

At first glance, this advice seems sound, even obvious, but having given it some consideration, I don't actually grasp what the difference is.

An Example:
Two Buyers, buying a £100K house have (after paying everyone else their cut) £52K for deposit & bank fees. They are both getting a mortgage with fees of £2K.

Buyer 1 lays down a £50K deposit, borrowing £50K and paying his fees up front. The size of his loan on day 1 is £50K
Buyer 2 lays down a £52K deposit, borrowing £48K and getting the fees added to the loan. The size of his loan on day 1 is £50K.

Am I right in thinking there's no difference, or have I missed some crucial point?

Thrugelmir

If the fees are £2k the property will have a total purchase price of £102k.

By only paying £50k deposit one borrower will borrow £52k.

The other paying fees upfront will borrow £50k.

You will repay £91,197 over 25 years on £52k, £87,690 on £50k. (Repayment mortgage 5%).

An additional £1,507 in interest.

VIGILANT22

How can you compare something that isn't comparable ie equal

barryireland

Thrugelmir wrote: »

If the fees are £2k the property will have a total purchase price of £102k.

By only paying £50k deposit one borrower will borrow £52k.

The other paying fees upfront will borrow £50k.

The one paying a 50K deposit is only borrowing 50K, not 52K. He is using the remaining 2K in his pocket to pay the fees.

The one paying 48K deposit is borrowing 50K, having elected to have the fees added to the loan.

As far as I see it, they are exactly the same. Your post brings in a completely different situation, in which the buyer borrows 52K and leaves 2K in his pocket, which is not what I was asking.

VIGILANT22

You start by saying both have 52K for deposit
Then you change by saying.......
Buyer 1 lays down a £50K deposit/Borrowed 50k
Buyer 2 lays down a £52K deposit/Borrowed 48k

How can you do a comparable when all things are not equal....

getmore4less

It makes no difference.

The money exist so reduces the total borrowing required or it doesn't and has to be borrowed.

Where this statement(pay the fees up front) comes from is that if you add fees(when you could have paid them) they are paid over the full term of the mortgage which does accumulate interest.

In the days of you get a loan and keep it going with normal payments even if you could pay more and for anyone that still operates their mortgage debt like this it will be a factor for them to consider(If they have the money).

For others there may be a consideration on LTV is marginal on a rate boundry and the fees don't count in the initial estimate so by adding the fees it increases the initial available deposit.

barryireland

Thanks getmore4less, I thought that was the case.

VIGILANT22 wrote: »

You start by saying both have 52K for deposit
Then you change by saying.......
Buyer 1 lays down a £50K deposit/Borrowed 50k
Buyer 2 lays down a £52K deposit/Borrowed 48k

How can you do a comparable when all things are not equal....

Read it again, I say they that after have £52K for deposit & bank fees.

My question, which getmore4less has clearly understood, and answered well, is whether it makes a difference, how that money is distributed.

Just in case this still isn't clear to some people, here is a rewording of the question:

If I have to borrow 2K more because I have used up some of the money in my pocket to pay fees up front, how is that different to having 2K more to pay as a deposit, and rolling the fees into the loan?

VIGILANT22

Interest on 50k is interest on 50k yes....but they're neither comparable or logical unless the rate for the LTV is different...........

flea72

barryireland wrote: »

I've often read advice suggesting that one shouldn't get the fees added to the loan, but that one should endeavour to pay them out of one's own money.

At first glance, this advice seems sound, even obvious, but having given it some consideration, I don't actually grasp what the difference is.

An Example:
Two Buyers, buying a £100K house have (after paying everyone else their cut) £52K for deposit & bank fees. They are both getting a mortgage with fees of £2K.

Buyer 1 lays down a £50K deposit, borrowing £50K and paying his fees up front. The size of his loan on day 1 is £50K
Buyer 2 lays down a £52K deposit, borrowing £48K and getting the fees added to the loan. The size of his loan on day 1 is £50K.

Am I right in thinking there's no difference, or have I missed some crucial point?

i think when people recommend not adding fees to the loan, they dont mean that you will be using the same starting point

when most people add fees to the loan, they would still put down the deposit of £52k, and then add the additional £2k for fees on top

they wouldnt be deducting the £2k fees off their deposit amount

i think you have interpreted their advice too literally

F

Thrugelmir

barryireland wrote: »

The one paying a 50K deposit is only borrowing 50K, not 52K. He is using the remaining 2K in his pocket to pay the fees.

The one paying 48K deposit is borrowing 50K, having elected to have the fees added to the loan.

As far as I see it, they are exactly the same. Your post brings in a completely different situation, in which the buyer borrows 52K and leaves 2K in his pocket, which is not what I was asking.

In the instance you quote, your question is meaningless.

barryireland

Thrugelmir wrote: »

In the instance you quote, your question is meaningless.

I don't follow. What is meaningless about it? Two people, with the same amount of money buy a house for the same sum. To add a bit more meaning to the question: There is only one buyer, with a certain amount of money in his pocket, and the lender asks whether or not he wants to pay the fees up front, or roll them into the loan. What should his answer be?

I'm asking whether using some of that money to pay the fees up front makes any difference to the outcome.

The answer can either be yes or no, not "it's meaningless". Either it makes a difference, or it doesn't.