What is a product fee on a mortgage?

What is a product fee on a mortgage?

A product fee is the lender’s charge for setting the mortgage up. Some don’t have product fees, but others may have a £495 or a £995 or even a £1,495 setup fee. I did one recently where it was £1,995.

Generally speaking, the bigger the product fee, the cheaper the interest rate. I’ll give you an example. We’re in February 2025 at the moment and I’ve just finished an appointment with a client, where we’re looking at Coventry Building Society mortgage.

They have one deal which is 4.27% with a £999 product fee. They have another rate of 4.42% – so slightly more expensive, but that has no product fee.

When you’re shopping online, comparison sites tend to only give you the cheapest interest rates but I always look at the total cost to pay. It depends how big the mortgage is in terms of whether to choose a mortgage with or without a product fee. And, if it’s with a product fee, which is better? The larger one or the smaller one?

When might I encounter a mortgage product fee?

You’d actually choose it as part of selecting your mortgage. When we apply for the mortgage, we decide what you’re doing with the product fee. Some lenders will let you add that product fee on the mortgage, so you don’t have to find the money upfront – but you will pay interest on it. It might still be the cheaper way forward. On other mortgages, the product fee is payable upfront.

How are mortgage product fees calculated? When are mortgage product fees charged?

Work with a mortgage advisor to assess which is the better product for you. A lot depends on the term, but if you’re arranging a mortgage for less than £170,000, you’re often better off going for something without a product fee and taking a slightly higher interest rate.

For a property worth more, you will usually save that £1,000 or £495 fee over the term of the mortgage. If it’s a slightly higher mortgage, you can swallow that product fee.

Do all mortgages have a product fee?

No, there are lenders who offer mortgages without product fees. Many lenders have two tiers, where they’ll have fees with some products and no fees on others. We would tailor the mortgage around your circumstances, the size of the mortgage and the term.

Can you reduce or avoid paying mortgage product fees?

You can avoid them by taking a product without one. In my example with the Coventry deals at 4.27% or 4.42%, with the 4.42% there is no product fee. You’ve completely avoided it, but you’re paying a slightly higher mortgage rate.

I had a client not long ago with quite a big mortgage at around £425,000. They didn’t want to pay a product fee, but I showed him the two examples with and without a fee. We demonstrated that it was so much cheaper with the product fee – he was taking a five year fixed rate and over that five years the lower rate saved him about £2,300.

There was a £1,000 set up fee, so it netted a saving of £1,300, and you’re not going to refuse £1,300 if someone handed it to you.

He’d never arranged a mortgage through a mortgage broker and always assumed product fees were to be avoided. It wasn’t until I’d explained how it worked that he realised that it was worth paying the fee.