What is an arrangement fee?
This is a fee charged to you by a lender when you secure a mortgage with them. The lender applies a cost to take out that product for you. It is essentially an administration charge for handling the process required to complete the loan.
You may also see it referred to by other names, such as a completion fee. It is only payable once you agree your mortgage with the lender and go through the process of taking it out.
When does the arrangement fee need to be paid?
It must be paid prior to the mortgage start date. However, some lenders do allow the mortgage holder to add the fee to their loan. Be very careful if you do this though, since it means you end up paying more.
If your loan is for £250,000 and you pay your £1,000 fee prior to beginning your monthly payments on the loan, interest is calculated on the £250,000 mortgage alone. However, if you decide to save some cash and add the fee to your loan, you would end up paying interest on £251,000 instead. It may not sound like a huge difference, but it can add up over a 25-year term.
For example, an interest rate of 3% over 25 years on a loan of £250,000 would produce monthly payments of £1,186. If you were to add the fee on top, those monthly payments would increase by £4. Over the lifetime of the mortgage, the total repaid (assuming all else remains equal) would increase by £1,423. That means you’d end up paying almost 50% more for your arrangement fee.
Of course, it could be more important for you to retain the cash, but it is worth knowing the difference it can make to your payments.
How is the fee calculated?
This can be done in one of two ways:
- It is often given as a flat fee, i.e. a specific amount of money
- It could be expressed as a percentage of the loan
Either way, you should know ahead of agreeing to the loan how much the arrangement fee is for.