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Virgin Money has made moves to stand out from the crowd by introducing residential remortgage products charging a percentage fee, rather than a fixed fee.
The new deals, which come at 60% and 70% loan-to-value (LTV), offer market-leading interest rates of 5.09% and 5.15% and a fee of 1% of the total mortgage amount. But are these low interest rates really that cheap after the fee is factored in?
Here, Which? explains how the percentage-fee model works, what brokers think of the new deals, and how they compare to fixed-fee alternatives.
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.
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.
Elliott Culley, director at Switch Mortgage Finance, said: 'This is a lender trying to find ways of attracting more business while rates are a little stagnant. From a broker's perspective, it's good to have options for customers and everyone's situation is slightly different.'
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.'
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.
| Lender | 60% LTV deal interest rate | Fee | Monthly repayment | Total paid back after 24 months, with fee added |
|---|---|---|---|---|
| Virgin Money | 5.09% | 1% of the mortgage amount | £1,180 | £30,320 |
| NatWest | 5.17% | £1,495 | £1,189 | £30,031 |
| Nationwide | 5.24% | £999 with £500 cashback on completion | £1,197 | £29,227 |
| NatWest | 5.48% | None | £1,226 | £29,424 |
Table notes: Calculations based on £200,000 mortgage with 25 years remaining. The total paid back after 24 months is calculated by paying fees upfront, rather than adding cost to the 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.
If you're unsure about which type of deal to go for, a mortgage broker will be able to research deals based on their true cost, taking into account rates, fees and incentives such as cashback.
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Home loans with percentage fees are rarely offered on residential mortgages. They are commonly seen in the buy-to-let mortgage range.
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.
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.
To see how you will be impacted, use our mortgage repayment calculator or check out our guide on what to do if you need to remortgage.
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