Here, Which? explains how the percentage-fee model works, what brokers think of the new deals, and how they compare to fixed-fee alternatives.
How do percentage fee mortgage deals work?
The majority of mortgage deals come with an additional fee you have to pay. These come under different guises, such as a product, arrangement or completion fee, and are traditionally a set figure such as £999 or £1,999.
However, Virgin Money has now introduced a 1% fee for a pair of two-year fixed products exclusively available to remortgagers.
The 1% is calculated as a percentage of the cost of the loan you need to repay. If the money you're being loaned totals £250,000, the extra fee you'll have to pay is a hefty £2,500.
If your mortgage amount is lower, the fee will also be lower. For example, someone remortgaging with £100,000 left to repay would have an additional fee of £1,000.
Find out more:Virgin's new remortgage products split opinion
Virgin Money's 'product innovation' has been praised by some mortgage brokers, while others have issued warnings to unsuspecting remortgagers who could find themselves footing a large bill.
Ranald Mitchell, director at Norwich-based broker Charwin Private Clients, says Virgin's new offers 'grab attention', while Andrew Montlake from Coreco says customers need to be careful.
Montlake said: 'Many consumers have been hypnotised by a low headline rate only to find that the fee or associated conditions carry a nasty sting in the tail.
'Percentage fees can work in some borrowers' favour depending on the loan amount, but the calculations need to be run and carefully compared.'
Find out more:How do Virgin's 1% deals compare?
Virgin Money's 5.09% product at 60% LTV is market-leading in terms of the interest rate. But the 1% fee means it isn't the best value for money unless you have a very small mortgage amount.
The table compares Virgin's new product with competitors charging either a set fee or no fee, based on the scenario of having 25 years left on a £200,000 mortgage.
The larger the remortgage amount, the greater the gap grows between the cost of the Virgin deal and others.
For instance, someone with a £300,000 loan would pay a total of £45,480 over the two-year period if they took out the Virgin deal. Meanwhile, the 5.24% Nationwide deal would cost almost £2,000 less – coming in at £43,603 over the two years.
As our calculations show, it's crucial to compare the overall cost of a mortgage before settling on a deal as a four-figure additional fee can easily negate the savings made by lower interest rates.
How common are percentage fee deals?
As it stands, there are currently 25 percentage-fee deals on the market for residential mortgages.
Virgin Money is the only big-name provider currently offering such products. The others are Family Building Society, Kensington, Kent Reliance and Darlington Building Society.
Christmas remortgage misery for homeowners
Around half a million mortgage holders are facing an imminent financial shock as their fixed deals end over the Christmas period.
Figures from the Financial Conduct Authority (FCA) show that almost 500,000 fixed-rate mortgages will come to an end between November and January.
As a result of higher interest rates, the vast majority of those having to remortgage will see their monthly bills rocket.
Which? Limited is registered in England and Wales to 2 Marylebone Road, London NW1 4DF, company number 00677665 and is an Introducer Appointed Representative of the following: 1. Inspop.com Ltd for the introduction of non-investment motor, home, travel and pet insurance products (FRN 610689). Inspop.com Ltd is authorised and regulated by the Financial Conduct Authority (FCA) to provide advice and arrange non-investment motor, home, travel and pet insurance products (FRN310635) and is registered in England and Wales to Greyfriars House, Greyfriars Road, Cardiff, South Wales, CF10 3AL, company number 03857130. Confused.com is a trading name of Inspop.com Ltd. 2. LifeSearch Partners Limited (FRN 656479), for the introduction of Pure Protection Contracts, who are authorised and regulated by the FCA to provide advice and arrange Pure Protection Contracts. LifeSearch Partners Ltd is registered in England and Wales to 3000a Parkway, Whiteley, Hampshire, PO15 7FX, company number 03412386. 3.Optimise Media Limited (FRN 313408), for the introduction of HSBC Group, who are authorised and regulated by the Financial Conduct Authority to provide credit brokering activity. Optimise Media is registered in England and Wales to Exchange Street Buildings, 35-37 Exchange Street, Norwich, England, NR2 1DP and company number 04455319. We do not make, nor do we seek to make, any recommendations or personalised advice on financial products or services that are regulated by the FCA, as we’re not regulated or authorised by the FCA to advise you in this way. In some cases, however, we have included links to regulated brands or providers with whom we have a commercial relationship and, if you choose to, you can buy a product from our commercial partners. If you go ahead and buy a product using our link, we will receive a commission to help fund our not-for-profit mission and our campaigns work as a champion for the UK consumer. Please note that a link alone does not constitute an endorsement by Which?.
source https://www.which.co.uk/news/article/virgin-money-launches-1-fee-remortgage-deals-can-you-save-auglv7V7tSEn