A product fee is a charge levied by the mortgage lender for a particular mortgage deal. In practice, it is the same as an arrangement fee — lenders simply use different terminology. Some lenders call it a product fee, others an arrangement fee, completion fee, or application fee, but they all refer to the upfront charge for setting up the mortgage.
Product fees typically range from £0 to £2,000 and are often associated with the lender's most competitive interest rates. The principle is straightforward: lenders offset a lower headline rate by charging a product fee upfront. For borrowers with larger mortgages, paying the fee can be worthwhile because the interest savings over the deal period outweigh the one-off cost. For smaller mortgages, a fee-free product with a slightly higher rate may work out cheaper overall.
As with arrangement fees, you can usually choose to pay the product fee upfront at completion or add it to the mortgage balance. Adding it to the loan increases your total borrowing and means you pay interest on the fee for the duration of the mortgage.
A lender offers two 5-year fixed deals: one at 4.1% with a £1,499 product fee, and another at 4.4% with no fee. On a £300,000 mortgage, the 4.1% deal costs £60,780 in interest over 5 years plus £1,499 = £62,279. The 4.4% deal costs £65,340 in interest with no fee. The product fee deal saves £3,061 over 5 years.
Key Points
- Another name for an arrangement fee — the terms are interchangeable
- Charged for setting up a specific mortgage deal
- Typically £0 to £2,000, often on the lender's best rates
- Can be paid upfront or added to the mortgage balance
- Compare the total cost including fees, not just the headline interest rate