An arrangement fee (also called a product fee) is a charge levied by the mortgage lender for setting up your mortgage deal. It is one of the most common mortgage fees and typically ranges from £0 to £2,000, although it can sometimes be higher for specialist products. Lenders often offer their lowest interest rates on products that carry a higher arrangement fee.
You usually have two options for paying the arrangement fee: upfront at the point of application or completion, or added to the mortgage balance. Adding it to the mortgage means you pay interest on the fee for the full mortgage term, which can make it significantly more expensive in the long run. For example, a £1,000 fee added to a 25-year mortgage at 4.5% would cost around £1,670 in total.
When comparing mortgage deals, it is important to factor in the arrangement fee alongside the interest rate. A mortgage with a lower rate but a £2,000 fee may actually cost more overall than a slightly higher rate with no fee, particularly for smaller loan amounts or shorter deal periods.
You are comparing two 2-year fixed deals for a £150,000 mortgage. Deal A: 4.2% with a £999 fee. Deal B: 4.5% with no fee. Over 2 years, Deal A costs £12,312 in interest plus £999 = £13,311. Deal B costs £13,140 in interest with no fee = £13,140. Deal B is actually £171 cheaper despite the higher rate.
Key Points
- Charged by the lender for setting up the mortgage product
- Typically ranges from £0 to £2,000
- Can be paid upfront or added to the mortgage balance
- Adding it to the loan means paying interest on the fee over the term
- Always compare total cost including fees, not just the interest rate