Product fee questions

Hi there!

My mortgage deal is about to expire. I’ve locked in a 5 year fixed with Virgin Money at:

·        3.88%

·        770 a month repayment (£113 higher than my expiring deal)

·        £1,495 product fee – added to loan.

·        LTV roughly 55% (I don’t know if my lender estimated and factored this in as I did not get a valuation, nor speak to them)

This was the cheapest available option (in terms of monthly repayments).

I don’t fully understand the implications of adding the product fee to my loan. My current finances are such that it is useful for me not to have to pay it up front.

My guess is that this slightly increases the cost of the monthly repayment (because the interest rate is applied to a slightly bigger amount). And that £770 x 60 + [product fee] = equals the total cost of this deal after 5 years. Does that sound about right?

Is there any benefit to overpaying a little here and there (I can do so up to 10%) in the first few months to offset this fee? So if I repaid the product fee by the end of 5 years, there is then a smaller amount to pay interest on in my next deal?



Comments

  • GrumpyDil
    GrumpyDil Posts: 1,566
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    Not quite. Your product fee simply gets added to the total loan amount and the amount you pay is then based on existing loan+product fee..

    And overpaying if you can afford it isn't a bad idea but as your interest rate is 3.88%and you can get savings accounts paying slightly more saving the money might make a little more sense.
  • On-the-coast
    On-the-coast Posts: 382
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    Simplistically You’ve made your mortgage slightly larger to avoid the pain of paying the fee up front.  Lots of people do this.  But it does mean you’ll be paying interest on that fee for the full term of the mortgage. 
    If you were to overpay between £25-30 per month for 60 months that fee would effectively go away. 
    Or make larger intermittent overpayments.  You could calculate this to the nearest penny, but it’s a mortgage on a house so mental calculation approximations are good enough for this small part of the big picture. 
  • Thank you!

    If I compare this to the no-product-fee option, is my 'cost over 5 years' calculation correct here?


    3.88%
    £1,495 product fee – added to loan
    £770 monthly repayment
    Cost over 5 years: 770*60+1495 (if I pay the fee off during the term) = £47,695

    Versus...

    4.27%
    No product fee
    £794 monthly repayment
    Cost over 5 years: 794*60= £47,640

    And would the remaining balance after this be near identical (£55 difference), assuming I pay off the product fee by overpaying during the loan?


  • kingstreet
    kingstreet Posts: 38,615
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    The outstanding balance on the lower-rated product will be lower. You need to factor-in the difference along with the fees and the interest.
    I am a mortgage broker. You should note that this site doesn't check my status as a Mortgage Adviser, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice. Please do not send PMs asking for one-to-one-advice, or representation.
  • Much appreciated. By lower rated you mean the one with lower repayment and lower interest rate? 
  • hufc2002
    hufc2002 Posts: 312
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    The outstanding balance will be less on the 3.88% product.
  • amnblog
    amnblog Posts: 12,389
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    What is your current balance? You have not stated that, nor the remaining mortgage term.

    For example, on the figures quoted, if for example, the balance was £70,000 with 9 years left to run.

    You need to save £1,495 in interest on the lower priced rate to get an advantage (covering the fee).

    The difference in the rates is 4.27% - 3.88% = 0.39%

    In simple terms 0.39% X £70,000 = £273 per year

    Over 5 years = £1,365 interest saved

    As a basic guide, that saving does not cover the cost of the £1,495 fee.

    Yes - it is more complex than that because as the mortgage reduces each month you pay slightly less interest each month. But the principle gets you in the ball park.

    If instead, the balance was £136,000 with 22 years left to run. You are paying more interest on more borrowing.

    0.39% X £136,000 = £530 per year

    Over 5 years = £2,650 interest saved

    Now the £1,495 fee on the low rated product sounds like a good deal.

    You can see how the key figure is not the monthly payment (which suggests £24 pcm saved), but the balance primarily, and the mortgage term if it is a close call.
    I am a Mortgage Broker

    You should note that this site doesn't check my status as a Mortgage Broker, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice.
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