Fees Vs No Fees Mortgages

SouthLondonUser

The alternative to not adding the fee is to pay it upfront, which is cheaper, and which ensures I am comparing a loan of the same amount. It's also what the OP said he wants to do. Think of it like a £999 interest payment at month zero - which I suppose is what you mean by one-off overpayment.

Yes, in theory you should consider that, if you save £13 every month, you could invest those £13. However, for such small amounts, it is quite realistic to assume they would just sit idle in a bank account earning no interest; even if they were invested in a saving account, the returns would be tiny and not make much of a difference.

If you are comparing the cost of a repayment mortgage vs an interest-only, then the difference in monthly instalment is large and considering what to do with the extra money becomes more important.

getmore4less

SouthLondonUser wrote: »

The alternative to not adding the fee is to pay it upfront, which is cheaper, and which ensures I am comparing a loan of the same amount. It's also what the OP said he wants to do. Think of it like a £999 interest payment at month zero - which I suppose is what you mean by one-off overpayment.

Thinking of it as interests would be silly it is capital,
could be paying fees, borrowing less, having sit in the bank or just spending it.

Yes, in theory you should consider that, if you save £13 every month, you could invest those £13. However, for such small amounts, it is quite realistic to assume they would just sit idle in a bank account earning no interest; even if they were invested in a saving account, the returns would be tiny and not make much of a difference.

If you are comparing the cost of a repayment mortgage vs an interest-only, then the difference in monthly instalment is large and considering what to do with the extra money becomes more important.

Nothing wrong with the cost model as long as you account for all of them.

ignore a pot of cash starting at £999 if you want.

min you can earn is the mortgage rate by just borrowing less, or use one the accounts paying more.

SouthLondonUser

Oh dear, silly?? And why would that be?

Capital is money you are, in a way, paying back to yourself as it adds to the equity in your house and therefore to your wealth.
Interest and fees are not - they are a pure cost, they do not add to your wealth.

Guess which category the £999 upfront fee falls into...

What do you mean by 'ignore a pot of cash "? I genuinely do not follow

getmore4less

The pot of cash you have not used to pay the fees.

The same with the myth paying fees up front save you money all you are doing is borrowing less.

if you have the cash to pay the fees there is a tiny difference between paying the fees up front against borrowing less and adding fees so the net borrowing and cash positions at the start are the same.

SouthLondonUser

The myth? Oh, dear, dear, dear...

Paying the fee upfront is an expense, it's not repaying capital because it does not add to your wealth. Even if you add it to the loan and therefore borrow more, it's the same because it does not add to your wealth.

Let's say that I have a mortgage of £100k on a property worth £300k, so equity of £200k.

Option 1: I remortgage, no fee. My equity is still £200k

Option 2: I remortgage with a £1000 fee I pay upfront. I have not borrowed more. My equity is still £200k.paying the fee upfront has not added to my wealth. The fee was an expense.

Option 3: I remortgage with a £1000 fee I add to the loan. This means I have borrowed more. I will be paying interest on a higher balance.

If you don't pay the fee at all or add it to the loan, depending on your tax situation and the rate you pay on the mortgage, you might be able to invest the £1000 in a saving account which pays a comparable rate to that of the mortgage. However, in most situations the net post tax rate you get from a saving account will be lower than your mortgage rate.

amnblog

This whole business about product fees, adding or paying, and comparisons, is an unnecessary complication of Lenders wishing to advertise attractive 'headline' rates without losing profit.

As noted, adding a £1,000 fee to a £99,000 loan is the same as borrowing £100,000, yet the Regulator has decided in it's wisdom to make an issue of it.

getmore4less

Let's say that I have a mortgage of £100k on a property worth £300k, so equity of £200k. and you have £1k in the bank

your replacement is £101 total.
the oprions for fee payment are
a. borrow £101k(add the fee) keep the £1k in the bank
b. borrow £101k(add the fee) then overpay by £1k net £0 in the bank.
c. borrow £100k(pay the fee) net £0 in the bank.
d. borrow £99k (use the £1k to top up to £100k then add the fee) net 0 in the bank

bcdd all cost the same the only reason it look like you save by paying the fees(which ever way you do it) is because you keep £1k back.

In effect you have borrowed £1k more and that will cost more.

The reallity is

if you don't have the money you have to add.

If you have the money and chose to use that to pay the fees then how you do that up front or adding(as long as you use it) makes no difference

if you have the money and plan to keep it you have to borrow more and that will cost more.

You seem to have become so fixated on costs you are ignoring the free cash flows(fee money and diffence in payments) which impact the second major cost the interest on the debt.

SouthLondonUser

No, I am not ignoring it. I simply believe comparing interest payments and fees in the two scenarios is more realistic.

What you have done is not incorrect: you calculated how much of the loan would be outstanding comparing two scenarios in which you start from the same amount of equity in the house, and pay the same every month, so in one case you are effectively overpaying. By the way, I am not sure you explained clearly enough that that’s what you have done – I wouldn’t be surprised if not everyone had understood this.

Like I said I have no interest whatsoever in convincing you. I just want to bring to the OP's attention some very banal facts:

1. Most, but not all, lenders allow overpayments. If overpayments are not allowed, the whole point about comparing what happens if you overpay by £13 per month becomes a purely theoretical exercise.
2. Some lenders allow you to set a direct debit with an overpayment every month. Some don't, and require you to contact them specifically every single time you want to make an overpayment. It's a personal decision, but I'm not going through the trouble of contacting a lender every single month to make an overpayment of £13 (or however much it is).
3. Like I said, yes, in theory you should compare the extra return you can get by investing the money you are saving. In reality, however, over relatively short time periods, for small amounts and with the current low-rate environments, the difference will be peanuts – not to mention probably theoretical only, because there is a chance the borrower will simply spend that money instead of saving it. For example, if I am comparing two broadband packages, with different upfront and monthly costs, I just compare the total cost, without going through the trouble of how much the net return, post tax, of investing the £4 difference every month would be. To each his own…

Thrugelmir

amnblog wrote: »

This whole business about product fees, adding or paying, and comparisons, is an unnecessary complication of Lenders wishing to advertise attractive 'headline' rates without losing profit.

More widely used to target a particular market segment. Bulk of the cost is up front in generating and processing new business. To the lender it's the amount of income (interest) that's generated. Whilst the borrower remains a customer.

Product fees are a result of the fragmentation of the market. Days are well gone when 2% above BOE base was the standard fare.

SouthLondonUser

Any industry thrives on lack of transparency. Want to guess how many borrowers do not really understand when fee + lower rate is cheaper than no fee + higher rate, and when not? ��