Is it better to pay a fee for lower mortgage interest rate?

[Rilo]

Which of these two deals is best?
3.33% with a £995 fee or
3.19% with a £1995 fee
Both are borrowing £250,000 on a 5 year fix. I’m confused…

You need to look at the difference in monthly repayments - work out what the difference is over 5 years and if the lower rate doesn’t save you more than £1k then it isn’t worth it

Is it repayment or interest only?

Run the figures through a mortgage calculator. Moneysavingexpert has a good one.

If you add the fee to the mortgage, try to make an overpayment of at least the fee amount quickly so that you aren't paying interest on it.

www.moneysavingexpert.com/mortgages/compare-mortgage-rates/

Input the figures on the above link. We don't know the mortgage terms, so can't do it for you. I suspect the higher fee one will be best though.

We've just fixed and in our mortgage meeting at the bank they worked it out for us and said it's more cost effective to go with the higher mortgage rate with no fee. I have no idea how they worked it out but I'm guessing it depends on lots of factors like loan amount, term etc. I was just glad we didn't have to pay £1000 fee because we were expecting to have to.

To do the calculation you need the term of your mortgage. Usually you want the lowest interest possible in the beginning, but it matters less and less towards the end where paying a fee is usually not worth it.

There are calculators online that will work this out for you. The question is how long do you need for the difference in monthly payments is be more than £1000 for it to be worth paying the higher fee to get the lower interest rate and is this more or less than five years?

If the difference in payments is a fiver a month, it will take 200 months or over 16 years so not worth doing as after 5 years, as you'll likely be looking for another deal then and potentially pay another fee and ask the same question again at that time

If the difference in payments is £50 a month, it will take 20 months or under 2 years before you'll be better off paying the higher fee to get the lower interest rate.

Divide the fee by the 60 months of the mortgage term to see what it's costing you per month. Is the cheapest rate more than that amount cheaper per month?

It's not a perfect calculation but unless you want to get really complicated it'll do.

Very simplified,
Assuming those are annual rates it is easier to look at the yearly difference than the monthly one.
The difference in the rate is 3.33%-3.19%=0.14% so 250k x 0.002 = £350 a year more on the higher rate.
On the lower rate, the fee spread over the 5 years is 1000÷5=£200 a year more.
So the lower rate is better.
This ignores compounding interest and repayments. The calculators can give you a more accurate answer tailored to your repayment level

It is repayment

Thanks. I did try that and it showed the lower rate was better. However the mortgage broker has advised us to go with the higher rate/lower fee option. So I started to doubt whether it was working properly...

The term is 22 years

Plugging those details into the MSE mortgage calculator, you actually get a different answer depending on whether or not you add the fee to the mortgage.

If you add the fee to the mortgage, the difference between the two products is £12 a month, so the higher rate/lower fee option is best (because you're paying interest on a smaller amount of money)

But if you don't add the fee to the mortgage, the lower rate/higher fee is better, but only slightly as the difference is £18 a month and it takes only about 4 months short of 5 years to recoup the higher fee that gets you a lower interest rate.

So if you can afford to pay a £2k fee separately that would be the cheapest option, and in a way, that's effectively the same as what was suggested by a PP in adding the fee to the mortgage and immediately.