A mortgage product fee is a charge a lender applies for the specific mortgage deal you take, sometimes called an arrangement fee, booking fee or completion fee. It is separate from valuation and legal costs and relates purely to the product itself. Lenders often offer the same underlying deal in two versions, one with a product fee and a lower interest rate and one fee-free with a slightly higher rate.
You can usually either pay the mortgage product fee up front on completion or add it to the loan, in which case you pay interest on it for the remaining term. Because the fee is fixed in pounds while the interest saving depends on the balance, the fee-paying option tends to suit larger loans and the fee-free option smaller ones. Comparing the total cost over the initial deal period, rather than the headline rate alone, is the reliable way to judge which version works out cheaper for your circumstances.
How Mortgage Product Fees Work in Practice
In short: a mortgage product fee is a charge a lender makes for a specific mortgage deal. It can be paid up front on application, paid on completion, or added to the loan, and adding it to the loan means you pay interest on it for the remaining term. Whether a fee-paying product works out cheaper than a fee-free one depends on the size of the loan, not on the fee alone.
Product fees are also described by lenders as arrangement fees, booking fees or completion fees, and the naming matters because it usually determines whether the money is refundable. A booking fee is commonly taken when the application is submitted and is often non-refundable even if the case does not complete, whereas an arrangement or completion fee is normally taken at completion and returned or never charged if the mortgage falls through. Some lenders split the charge, taking a smaller non-refundable booking fee and a larger completion fee.
The practical question is whether the fee is worth paying. Because the fee is a fixed cash amount and the interest saving is a percentage of the balance, a fee-paying product tends to favour larger loans and a fee-free product tends to favour smaller ones. On a small remaining balance, a typical four-figure product fee can cancel out the whole benefit of a lower rate over a two-year deal period, while on a large loan the same fee is recovered quickly. The comparison should always be made on the total cost over the initial deal period, not on the headline rate.
Adding the fee to the loan is convenient but not free. The fee then attracts interest for the remaining mortgage term rather than just the deal period, so a fee added to a 25-year mortgage can cost substantially more than its face value by the time the mortgage is repaid. It also increases the loan amount, which in a borderline case can push the application into a higher loan-to-value band and reduce the range of products available. If cash allows, paying the fee separately avoids both effects.
Product fees sit alongside, and are separate from, valuation fees, legal fees, telegraphic transfer or funds transfer fees, and any broker fee. Under FCA rules all of these must be set out in the illustration you are given before you apply, so the illustration is the document to compare between lenders rather than the advertised rate. Related reading: mortgage loan-to-value bands, guide to mortgage interest rates and UK mortgage requirements.
Reviewed by Damian Youell CeMAP. Needing Advice gives independent, FCA-regulated mortgage advice with no obligation to proceed.