Low Rate or Low Fee? How to Compare Mortgage Deals When Averages Hit 6%
With average fixed rates touching 6%, the headline rate is only half the story. Here's how I weigh arrangement fees against rates, and the simple sums that show which deal really costs less.
This week the average five-year fixed rate nudged up to 6% for the first time in about three years, according to Moneyfacts, with the average two-year fix at 5.98% on Monday. At the start of September there were nearly 1,500 deals below 5%; now there are just nine. When rates move like this, it's tempting to scan a comparison table, sort by the lowest rate and click the top result. I'd urge you to pause first, because the cheapest-looking rate is not always the cheapest mortgage.
Where we are this week
The Bank of England held Bank Rate at 3.75% in September, but the vote was 6–3, with three members wanting an immediate rise to 4%. Inflation has edged up to 3.1% on higher energy prices, and the next decision is on 5 November. Markets are leaning towards a rise, and that expectation is already feeding into the swap rates lenders use to price fixed deals. The average standard variable rate is around 7.13%, so staying put on a reversion rate is rarely the answer.
In a market like this, small differences matter more. A fee of £1,999 feels very different when your rate is 6% than it did when deals started with a 3 or a 4.
The trade-off in plain English
Most lenders offer a choice. You can often pick a lower rate with a higher product fee, or a slightly higher rate with little or no fee. Neither is automatically better. It comes down to how big your loan is and how long the deal lasts.
As a rough rule, a bigger loan favours the lower rate, because each 0.1% saved is worth more pounds. A smaller loan often favours the lower fee, because there's less interest to save and the fee takes longer to earn back.
A worked example
Say you're borrowing £250,000 on a two-year fix. Deal A is 5.69% with no fee. Deal B is 5.49% with a £1,999 fee. The rate gap is 0.20%, which on £250,000 is roughly £500 a year in interest, so about £1,000 over two years. Deal B's fee is almost twice that. Deal A is cheaper.
Now stretch it to a five-year fix on the same loan. The same rate gap saves roughly £2,500 over the term, which comfortably beats the £1,999 fee. Now Deal B comes out ahead. These are simplified figures, since your balance falls a little if you're on a repayment mortgage, but the principle holds: the longer the deal, the more a low rate is worth.
Don't forget the fee you add to the loan
Many people add the product fee to the mortgage rather than paying it upfront. It's convenient, but you then pay interest on that fee for the full term of the mortgage, not just the fixed period. A £1,999 fee added to a 25-year mortgage at around 6% costs noticeably more than £1,999 in the end. If you can comfortably pay it upfront, you'll usually be better off. If cash is tight, adding it is perfectly reasonable, as long as you know what it really costs.
Other costs that change the picture
The product fee is only one line. Before you commit, check these too:
- Valuation and legal fees. Some deals include free valuations and legal work on a remortgage; others don't. That can be worth several hundred pounds.
- Early repayment charges. If there's a chance you'll move or overpay heavily, look at how much you'd be charged to leave early.
- Cashback. A higher-rate deal with cashback can beat a lower-rate one once you've added it up, but only if you'd use the cash sensibly.
- Portability and overpayments. Flexibility is worth paying for if your plans may change.
What I'd do this week
If your fixed deal ends in the next six months, look now rather than waiting for November. Most lenders let you secure a new rate well ahead of time, and many allow you to switch to a better deal if rates fall before completion. If you're buying, an up-to-date agreement in principle lets you move quickly when the right property appears.
Whatever you do, compare deals on total cost over the period you expect to keep them, not on the headline rate alone. It's the sort of sum I work through with clients every week, and it often changes which deal comes out on top.
Kindest regards
Ian
Ian A Moore CeMAP — Director, IM Mortgage Consultancy Limited
Your home may be repossessed if you do not keep up repayments on your mortgage. IM Mortgage Consultancy Limited is authorised and regulated by the Financial Conduct Authority. This article is for general information only and does not constitute mortgage advice; rates and figures quoted were accurate at the time of writing and are subject to change.