Arrangement fees on the rise

As we all know, Bank of England base rates have increase four times in the last ten months, to take the base rate from 4.5% to 5.5% in May. Along with that mortgage rates have been quick to follow suit. But the banks are attempting to hide their increases.

When borrowers look for the best mortgage deal they usually look for headline interest rate of the deal first. But they can then be greeted with massive arrangement fees as lenders attempt to disguise the hike in rates. Since the start of June – when there has been no Bank of England base rate rise – most fixed rate deals have gone up, but banks try and keep the rates looking good, and increase fees instead. Some fees have gone up by more than £1000.

Variable rate mortgages are also suffering the same fate. The reason that borrowers are having to stump up more in fees is because lenders buy their funds from the money markets, and rates here are on the increase.

Charges on mortgages now average around £1000 on any rate less than 5.5%, and for rates less than 5% charges are more like £1,500. If the mortgage is large too, charges can get really big, such as one example of £4,550 on a £130,000 mortgage.

Interest rates were last at 5.5% in May 2001, and mortgage rates were very comparable for the best deals. Yet fees then were only around £300.

With base rates almost certain to rise again – possibly even as early as July – there is a gloomy forecast that we may soon see the end of fixed rate mortgages less than 6% - unless you are willing to pay an exorbitant fee. If these arrangement fees are added to the loan – and it is usually suggested by the supplier that they are – then you are charged interest on it for the rest of the loan period – which may be as long as 25 years. Calculating what you pay back makes the initial headline rate look a little less attractive.

Borrowers can find things even more complicated when the lenders charge a percentage fee rather than a flat fee. This obviously means that the more you borrow, the more you have to pay.

Bradford & Bingley has a 4.99% two year fixed rate mortgage on which the fee has changed from £1,499 to 2%, so you would need to have a mortgage of less than £75,000 to be better off with the percentage charge. An example on a £120,000 would be a fee of £2,400.

In mid June Alliance & Leicester put fees up on some fixed rate mortgages from £1,399 to £1,999. Northern Rock’s highest fee is 3.5% on its two year fixed rate of 4.79%. This one means a fee of £4,550 on a mortgage of £130,000. Northern Rock also gives you the option of choosing a lower fee and a higher rate.

High fees may actually be the best option for some borrowers. Between August and December this year around 820,000 borrowers will come off cheap two and three year fixed rates, and they are going to face an enormous potential increase in their mortgage repayments. Those who can’t afford the new higher fixed rate levels will find their monthly costs more manageable if they opt for the lower rate and pay the fee. Just the last few days have seen rises of 0.7% on fixed rates, and that would make a £130,000 cost another £56 per month.

Another option is to make over-payments as much as you can so that you clear the effect of the fee as quickly as possible. If you took Northern Rock’s 3.5% fee option on a £130,000 mortgage your repayments would be £625 higher over the two year period, and it equates to £5,288 in extra interest over 25 years, if you were to go onto Northern Rock’s Standard Variable Rate when the fixed period finished.

Cheltenham & Gloucester has a 2.5% fee on its 4.98% two-year fix which is only available through brokers. This would add £425 over two years and £3,746 in interest over the term.

Those complexities show why it is crucial you seek independent advice, if necessary, on the thousands of different mortgage deals available to ensure you pick the most suitable one.

In most cases it is best to avoid percentage fees if you can, as these rarely work out cheaper on mortgages at today’s levels.

It is also best to pay the fee if you can, rather than add it to the mortgage loan. Doing the latter can work out to be very expensive over the term of a mortgage, especially as interest rates are higher now. You’ll be lumbered with that extra debt for up to twenty-five years.

As David Hollingworth, from London & Country, says: ‘The smaller the mortgage the bigger the impact of fees so it is important to look for something that does not carry a high charge. On higher loans, flat fees generally work out better than percentage ones.’