Should You Pay Your Mortgage Fee Upfront or Add It to the Loan?

The Two Options Explained

When your mortgage deal includes an arrangement fee, you'll typically be given two choices for how to pay it. You can pay the fee upfront, usually at the point of completion, which means it's settled immediately with no further cost. Alternatively, you can add it to your mortgage balance, which means you borrow the fee amount and repay it alongside your regular mortgage over the full term.

Adding the fee to the loan is often presented as the more convenient option, especially if you don't have the cash readily available. However, convenience comes at a price, because you'll be paying interest on the fee for potentially 25 years or more.

Understanding the true cost of each option is essential for making an informed decision. What seems like a small difference at the outset can add up to a significant sum over the life of your mortgage.

The True Cost of Adding the Fee to Your Loan

When you add an arrangement fee to your mortgage, you pay interest on that amount for the entire mortgage term. This turns a fixed fee into a much larger long-term cost.

For example, a £999 fee added to a 25-year mortgage at 5% would accrue approximately £750 in additional interest over the full term, making the true cost around £1,749. On a 30-year mortgage at the same rate, the total cost would be closer to £1,940.

The longer your mortgage term and the higher your interest rate, the more expensive it becomes to add the fee. If you remortgage every two to five years (as many people do), the added fee on each occasion compounds the cost further, as you'd be paying interest on multiple added fees simultaneously.

When Paying Upfront Makes Sense

Paying upfront is almost always the cheaper option in pure financial terms. You pay the face value of the fee and nothing more. There's no ongoing interest cost and no increase in your monthly payments.

This option makes particular sense if you have savings available and the fee won't deplete your emergency fund. It's also a good choice if your mortgage rate is relatively high, as the interest cost of adding the fee would be proportionally larger.

If you're comparing two deals and the arrangement fee is a deciding factor, paying upfront gives you the most accurate comparison. When fees are added to the loan, they distort the monthly payment figure and make it harder to see which deal is genuinely cheaper.

When Adding the Fee to the Loan Makes Sense

Despite the additional interest cost, there are legitimate reasons to add the fee to your mortgage. If paying the fee upfront would leave you without adequate savings or an emergency fund, it's arguably better to add it to the loan and maintain your financial safety net.

Adding the fee can also make sense if you plan to make overpayments on your mortgage. By overpaying, you can effectively repay the added fee early and reduce the interest you'd pay on it. If you overpay by the fee amount within the first year or two, the interest cost is minimal.

Some borrowers also prefer to keep their cash liquid for investment purposes. If you can earn a higher return on your savings or investments than the interest rate on your mortgage, it may be mathematically better to add the fee and invest the cash elsewhere. However, this carries investment risk that paying a guaranteed mortgage fee does not.