Mortgage fees rocket skywards

Competition is fierce among mortgage providers. They all want a slice of the action, and when they’ve got that – they want more. Therefore, they have to make their mortgages look more appealing than the next one. How do they do that, yet maintain a nice hefty profit for themselves? They reduce the headline rate of interest … but bump up arrangement fees which lurk in the background.

Homebuyers are being sucked into the trap of taking out what appear to be good value deals only to be hit hard with huge fees. These have rocketed so much that some lenders have increased arrangement fees by over 600% in the last two years.

By apparently having low interest rates mortgage providers can push themselves further up best-buy tables, where in reality they are making their money by charging higher arrangement fees.

Incredibly, Intelligent Finance, which is a subsidiary of biggest mortgage lender Halifax, now charges an arrangement fee of £2,999 in some cases, which is up by an amazing 601% on the maximum it was charging two years ago. It is impossible to believe that the actual cost of arranging a mortgage can have gone up by £2,500 in the last two years! In fact, costs are likely to have gone down thanks to computerisation. The huge increase must go straight into the provider’s swelling coffers.

Finance experts have slammed the practice, saying that it cons the consumer, in a period when interest rates have gone from 4.5% last July to 5.75% a year later to reach their highest level since March 2001. Lenders are accused of using the headline interest rate to attract customers, and then using arrangement fees as a sting in the tail. There is, say experts, no justification for the way fees have soared in the last two years as there is no more work involved now than before.

Scottish Widows, part of Lloyds TSB, now has a maximum fee of £1,999, up from £295 two years ago, meaning a rise of 678%. Abbey, Nationwide, Northern Rock and Woolwich, part of Barclays, have all increased their fees dramatically too.

Abbey mortgages that are sold directly to a customer have fees that peak at £995, but if the mortgage is taken out through a broker the fee can be as high as £1,499. Some other lenders follow suit.

Other lenders now charge an arrangement fee as a percentage of the loan, so someone borrowing £300,000 would have to pay an arrangement fee three times higher than someone taking out a £100,000 loan. This practice is seen as particularly annoying as the work involved is hardly any different.

Homebuyers are coming under increasing financial pressure all the time. Nowadays, around 75% choose a fixed-rate mortgage for two or three years. Those loans taken out in 2005 and 2006 will affect 2.8m people when they come to an end soon, and the customers will be hit with a sudden leap in payments when their current deals end. A loan of £125,000 will be subject to an increase of £245 per month if it is left to transfer to a standard variable rate mortgage, which could possibly move an old fixed rate of 4.75% to 8%. The problem is that a new fixed rate loan will probably have a nasty arrangement fee attached to it, as well as the fixed rate being much higher than the 4.75% example.

The advice to homebuyers is to not be lured by the exciting low headline rates, but to check out all fees and include them in calculations to understand the true cost of a loan. The last housing market crash was 16 years ago, and for first-time buyers houses have now reached a higher peak of unaffordability than then. With stamp duty at its highest ever level – capturing more people than ever before, it is easy to see why so many people are struggling financially in the face of the increasing cost of moving, or simply owning a home.

In May 60% of first-time buyers had to stump up stamp duty, with the average price of a home at £155,000, and the zero stamp duty threshold down at £125,000. An average first-time buyer will now spend a month shy of five years saving for legal fees, stamp duty and a 5% deposit to come up with the £9,844 needed. In 2005 the time needed was only four years.

Interestingly enough, the number of mortgage approvals has gone up again, according to the Bank of England, with 114,000 loans approved in May compared with 109,000 in April. That makes the prospect of further interest rate rises very real.

Conversely, house price growth did slow down in May. The average home in the UK cost £211,056 in the year to the end of May, up 10.9%. This is down from a rate of increase of 11.3% for the same figure in April.