Arrangement Fees: Get the sums right, and it can pay to spend £1,999 on a mortgage
Lenders' charges are rising, but that isn't always a bad thing
Sunday 29 October 2006
For most mortgage-hunters, the priority is a low rate of interest. After all, the more you can screw down your monthly repayments, the better.
But the cheapest home loan rates are carrying ever-bigger price tags - in the shape of vertiginous arrangement fees.
For example, a competitive two-year fixed-rate deal from Abbey, with interest charged at 4.45 per cent, now has a £1,999 fee; ditto Birmingham Midshires' two-year fix at 4.49 per cent.
At Halifax, a two-year fix at 4.39 per cent will set you back £1,499.
The average arrangement fee is now about £500, payable either as a flat-rate fee or as a percentage of the overall sum borrowed.
Northern Rock has recently introduced a two-year fix at an extremely low 3.99 per cent - however, it comes with a huge 2.5 per cent arrangement fee.
It's not just the banks that are cashing in. Nationwide building society levies a £1,499 fee on its two-year fix at 4.47 per cent, while Leeds building society has a 2 per cent fee on its 4.49 per cent three-year fix.
"There have been some eye-watering arrangement fees introduced in recent months, as lenders jockey for position at the top of the 'best buy' tables," says Melanie Bien, associate director at broker Savills Private Finance. "High fees enable lenders to offer cheap mortgage rates - because they have to make their money somewhere."
But while most borrowers will view high arrangement fees as a bad thing, Andrew Montlake of broker Cobalt Capital says that they can often work in the borrower's favour.
"By paying a higher arrangement fee, borrowers can secure a far more competitive interest rate," he says. "If you are borrowing a reasonable amount of money, the reduced interest - even for a two-year fixed-rate product - can let you claw back the arrangement fee and save a significant sum in interest [compared with rival deals with lower fees]."
The key to working out whether the fee is worth paying is the size of your mortgage. As a general rule, the bigger the mortgage, the more important it is to find a competitive rate of interest - and the less you need worry about the fee.
For example, if you were looking for a £100,000 interest-only mortgage with a 25-year term, it would cost you £370.83 a month if you took out Abbey's two-year fix at 4.45 per cent, plus a fee of £1,999.
Compare this with Britannia building society, which has a slightly more expensive interest rate - 4.64 per cent - on its two-year fix but charges a fee of just £399. This would leave you paying £387 a month.
But Ms Bien points out that while you would save £388 in mortgage payments over two years on the Abbey deal compared with Britannia's, you would have to pay £1,600 in fees (£1,999 minus £399) in return for this saving. So it would actually cost you £1,212 more (£1,600 minus £388) to go with the Abbey deal.
Crank up the size of the loan, though, and the picture is very different.
To borrow £500,000 would cost £1,854 a month with Abbey or £1,933 with Britannia. Now, in this scenario, the Abbey deal is £79 a month cheaper, and even after taking the fees into account, you would be £296 better off over two years than if you were with Britannia.
As these examples show, comparing mortgages is no mean feat.
Flat fees are generally better for borrowers with a large mortgage, because they account for a smaller proportion of the loan; but a broker will be able to work out the best deal for you.
"High and widely varying arrangement fees are making it so much more difficult for consumers to compare mortgages - to see which truly offer the best value," says Nick Gardner of broker Chase de Vere Mortgage Management.
"Even for brokers, there have never been so many variables to consider - assessing the most suitable loan is harder than ever."
Although the increase in arrangement fees is bad news for many borrowers, who are already struggling to meet the cost of buying a home, you can usually add the fee to the mortgage.
But Ms Bien cautions: "This does mean you pay back more in the longer term, as you also pay interest on the fee."
On the plus side, large arrangement fees are proving a good deal for buy-to-let borrowers, who need to keep their monthly outgoings as low as possible. Fixed rates of less than 5 per cent are now available to them because of large upfront 1.5 per cent fees. This allows landlords to keep monthly mortgage costs low and boost their cashflow. The arrangement fee can be offset against tax, too.
Landlord's choice: Jolyon Grace has benefited by paying a high arrangement fee on his low-rate buy-to-let mortgage, allowing him to make the most of monthly rental income COLIN MCPHERSON
Jolyon Grace, 37, from Cheshire, has just remortgaged to a new buy-to-let deal with Northern Rock, where the arrangement fee is 2.5 per cent of the sum borrowed.
This is high, but it means that Jolyon can benefit from a low rate of 4.79 per cent, fixed for two years.
"The biggest issue for me is the rental cover I can get on my buy-to-let," he says, "and the next biggest issue is the mortgage rate - the lower I can get, the better."
In this way, he can maximise his cashflow.
"I'd like to have a lower arrangement fee," he says, "but you have to do the sums and balance everything up and, in my case, the high fee is worth it."
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
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