Watch out for arrangement fees on mortgages

The global credit crunch has really taken its toll on the mortgage industry, and over the past six months many areas of the mortgage sector have been affected, reducing affordability for not only consumers but also for the lenders themselves.

Across the UK lenders have found it a real struggle to obtain the finance that they need in order to fund their mortgage lending, and industry officials have been calling upon the government to intervene in order to increase liquidity and ease the mortgage market.

The government has taken steps to help out, by injecting billions into the money markets and coming up with a recent plan to allow lenders to switch mortgage assets for government bonds.

This latest plan, which could be launched as early as this week, has met with approval from Tory party officials, although the Tory Party has urged the government to act quickly.

In response to the plans the Shadow Chancellor stated: “There are thousands of people facing the prospect of real hardship because they cannot find mortgage deals to re-mortgage onto, so unblocking the financial system I think is a very important step. If the government comes forward with a sensible idea, and I’d urge them to get on with it because after all we’ve been dealing with this problem now for months and the dithering is not helping anyone, then we will support it.”

The plans have not been met with approval by all, however, with officials from the Liberal Democrats concerned that taxpayers could end up paying the price.

A Liberal Democrat official said: “I am very concerned that in addition to all the costs associated with Northern Rock, the government is going down the disastrous road of bailing out the banks and leaving the taxpayer with the liabilities.”

The Council of Mortgage Lenders recently commented on the problems in the mortgage market, stating: “I have a sense of shock at how deeply our successful industry has already been hit by these unprecedented funding market conditions. Potential borrowing still significantly exceeds the industry’s collective capacity to supply funds. It is therefore a real possibility, looking forward from today, that net lending in 2008 could reach only half last year’s level unless additional funds become available.

But it doesn’t have to be that way.” The CML added: “Without attracting new funding sources, we will see an ongoing process of attrition in mortgage choice, possibly over a protracted period, with lenders managing down demand by tightening lending criteria, increasing price, or withdrawing more products from the market altogether.”

In the meantime, it seems that the cost of inter-bank lending and the effects of the global credit crunch are being covered by consumers, as accessibility to mortgages and affordability levels continue to plummet.

A recent report has shown that consumers are being hit in a number of different ways when looking for a mortgage or remortgage, and increased arrangement fees are just one of the things that could see homeowners severely out of pocket.

According to a recent report some people that are taking out a mortgage or remortgage could end up paying thousands of pounds for the privilege by way of arrangement fees, as these fees appear to have rocketed and almost doubled in some cases in the space of one year.

Last March the arrangement fee on a best buy three year fixed rate mortgage was around £578 but this has now risen by 96% to £1132. On a two year fixed rate mortgage the fee has risen from £999 to £1478.

Some customers that take up the new Rate Matcher mortgage from HSBC could end up paying fees as high as £5000 according to some industry experts.

One official involved in researching these figures said that it was vital that customers make sure that they check the arrangement fee as well as the rate of interest charged when comparing mortgages and remortgages, as this could really bump up the cost of borrowing.

He said: ‘After all the panic of recent weeks in the mortgage market, people may be tempted to grab the best deal they can and focus on rates to the exclusion of everything else. They could be in for a nasty shock when it comes to the fee which is charged as they have rocketed in the past year.’

There are many other issues that are affecting affordability and accessibility for those looking for mortgages and remortgages. Despite three interest rate cuts over the past few months, many lenders have continued to hike up the interest rates charged on their mortgage products, which has made it increasingly difficult and expensive for consumers to get finance.

Lending criteria has also been tightened, which has reduced accessibility for many borrowers. And with many lenders demanding higher deposits for competitive mortgage interest rates, first time buyers are experiencing further problems when it comes to getting onto the property ladder.