Understanding Product Fees: One Size Doesn ' t Fit All
Roger Morris, Group Distribution Director, Chetwood Bank for CHL Mortgages
When discussing mortgage product fees, it ' s easy to fall into the trap of assuming that lower is always better. Borrowers naturally gravitate towards products with small fees, and advisers may understandably start their search there. Yet doing so can mean overlooking solutions designed to meet a different need.
Product fees, particularly larger percentage-based fees, have attracted their share of criticism. Viewed in isolation, a fee of 5 %, 7 % or more can look expensive. But the fee is only one part of how a mortgage product is structured. To understand its value, brokers need to consider what sits alongside it.
Typically, a higher product fee will be paired with a lower interest rate. That doesn ' t necessarily mean the borrower will pay less overall. The reality is that lender product fees are simply one part of how a mortgage is priced. Understanding the role they play can help brokers identify more suitable options for their clients.
Where both products carry percentage-based fees, the additional fee and lower rate may broadly offset one another over the initial product period. And where the fee is added to the mortgage, the borrower will also pay interest on that additional borrowing.
That ' s an important distinction. The case for a higher-fee product isn ' t simply that a lower rate will automatically outweigh the additional fee. In many buy to let cases, its real value may be the additional borrowing capacity that lower rate creates.
Affordability is a good example.
Where borrowing is assessed using an interest coverage ratio based on the product ' s pay rate, a lower interest rate can materially increase the amount a landlord is able to borrow.
Take a property generating £ 24,000 in annual rent. At a 125 % interest coverage ratio, a 5-year fixed rate of 5.00 % would support borrowing of £ 384,000. Reduce that pay rate to 4.00 % and the maximum borrowing amount increases to £ 480,000.
That ' s an extra £ 96,000 of additional potential borrowing capacity before considering other lending criteria.
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