Mortgage fees on the rise

Don't get sidetracked by interest rates and fail to spot less obvious home loan costs, warns Stephen Pritchard

Interest rates might seem to have peaked - with the Bank of England leaving its base rate on hold last week, but other costs associated with buying a home appear to be rising inexorably. The fees levied by banks and building societies for arranging a loan are especially prone to inflation. While lenders compete fiercely to attract remortgage customers in particular, with deals such as free valuations, these may well be more than offset by other, compulsory fees attached to the loan.

Interest rates might seem to have peaked - with the Bank of England leaving its base rate on hold last week, but other costs associated with buying a home appear to be rising inexorably. The fees levied by banks and building societies for arranging a loan are especially prone to inflation. While lenders compete fiercely to attract remortgage customers in particular, with deals such as free valuations, these may well be more than offset by other, compulsory fees attached to the loan.

So-called arrangement or booking fees are most usually associated with fixed, capped or discount deals. The fees allow lenders to charge - and publicise - a more attractive interest rate, but to claw back some of the lost profit through the higher fees.

Over the period of a fixed or discount deal, mortgage fees have a similar effect to paying a higher rate of interest. David Hollingworth, a director at mortgage broker London & Country, says that the charges can be significant. "Paying a £499 fee as opposed to a £299 fee on a two-year deal effectively adds 0.1 per cent to the pay rate on a £100,000 interest-only mortgage," he explains. And fees have risen steadily over the past few years, especially on lower-interest-rate mortgages. Whereas two or three years ago arrangement fees for fixed-rate mortgages were about £300, they have now moved to between £400 and £500 on the mortgage with the most attractive interest rates.

Abbey has a two-year tracker mortgage with an attractive rate of 4.44 per cent, but the arrangement fee is £499. For a fixed rate for five years with the Portman, at 4.8 per cent, the arrangement fee is £500. Among the most expensive, when it comes to fees, are mortgages from Northern Rock, where the general fee is now £595 and, for some deals, as high as £695. Even Nationwide, one of the most transparent lenders, has increased its fees four times on fixed and tracker loans since 2003. It now charges £389 to arrange these loans.

In most cases, though, borrowers can trade off a higher upfront fee against a higher interest rate. Northern Rock, along with Halifax and Abbey, has a range of mortgages with a higher basic interest rate and lower fees. And most lenders have arrangement-fee-free mortgages, especially their standard variable rate loans.

A mortgage advertised at, say, 4.89 per cent rather than 4.99 per cent looks more attractive. But home-buyers only have themselves to answer to if they fail to read all the small print, including the cost of any upfront fees.

These calculations are not straightforward. The exact impact of a higher fee or a higher interest rate will depend on the size of mortgage and how long a homebuyer plans to stay with the lender, as well as the fees and rates themselves.

"These higher fees do not necessarily make the product a bad deal, but they do need to be factored into the value and this will be individual to the borrower," says Mr Hollingworth. "For example, the impact of a bigger fee on a two-year mortgage is greater than on a five-year mortgage. Those with a smaller mortgage will suffer more from larger fees than borrowers with a big mortgage."

For a large mortgage, a high fee of £500 or more could well be an acceptable price to pay in return for a lower rate of interest. Five-year fixed-rate mortgages are starting to look attractive once again, as lenders come to the view that long-term interest rates are falling. A borrower looking for £100,000 or more over five years should be able to absorb the cost of any arrangement fees during the period of the fix. A borrower taking out a small loan will have less chance of recouping higher fees through a lower interest rate, as the discount will make less of an impact on their monthly payments.

And buyers who plan to remortgage in the short term - or have to, because they take out a short-term deal - should pay attention to arrangement fees. Paying two sets of fees in a five-year period could work out more expensive than staying with one lender, even on a slightly higher mortgage rate.

Since the Financial Services Authority took over mortgage regulation last autumn, lenders have been obliged to produce clear statements of costs associated with a mortgage. This makes comparisons easier. Buyers should use this information to work out whether a loan with a large upfront fee is worthwhile. Alternatively, a mortgage broker will be able to calculate the best deal, but buyers should be aware that brokers can charge up to 1 per cent of the mortgage in their own fees.

Borrowers should be wary of adding fees to the mortgage, even if the lender makes this seem easy. Adding fees to mortgage means paying interest, possibly for as long as 25 years. If possible, it is cheaper to pay fees in cash.

News
A scene from the video shows students mock rioting
newsEpic YouTube video features boundary-pushing staging of a playground gun massacre
Travel
travel
Voices
A family sit and enjoy a quiet train journey
voicesForcing us to overhear dull phone conversations is an offensive act, says Simon Kelner
Arts and Entertainment
The cast of The Big Bang Theory in a still from the show
tvBig Bang Theory filming delayed by contract dispute over actors' pay
PROMOTED VIDEO
Sport
England celebrate a wicket for Moeen Ali
sportMoeen Ali stars with five wickets as Cook's men level India series
News
Morrissey pictured in 2013
people
Life and Style
The director of Wall-E Andrew Stanton with Angus MacLane's Lego model
gadgetsDesign made in Pixar animator’s spare time could get retail release
News
peopleGuitarist, who played with Aerosmith, Lou Reed and Alice Cooper among others, was 71
Travel
travel
News
Robyn Lawley
people
News
people
News
i100  ... he was into holy war way before it was on trend
Arts and Entertainment
High-flyer: Chris Pratt in 'Guardians of the Galaxy'
filmThe film is surprisingly witty, but could do with taking itself more seriously, says Geoffrey Macnab
News
people
Life and Style
food + drinkVegetarians enjoy food as much as anyone else, writes Susan Elkin
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    1st Line Support Technician / Application Support

    £20000 - £24000 per annum: Harrington Starr: A leading provider of web based m...

    Team Secretary - (Client Development/Sales Team) - Wimbledon

    £28000 - £32000 per annum: Ashdown Group: Secretary (Sales Team Support) - Mat...

    Accountant / Assistant Management Accountant

    Competitive (DOE): Guru Careers: We are looking for an Assistant Management Ac...

    Senior Investment Accounting Change Manager

    £600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...

    Day In a Page

    Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

    The day America’s love of backyard tigers led to a horrific bloodbath

    With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
    Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

    How Samuel Beckett became a French Resistance spy

    As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
    We will remember them: relatives still honour those who fought in the Great War

    We will remember them

    Relatives still honour those who fought in the Great War
    Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

    Kodak's last-ditch bid to keep celluloid alive

    Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
    Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

    Acting in video games gets a makeover

    David Crookes meets two of the genre's most popular voices
    Could our smartphones soon be diagnosing diseases via Health Kit and Google Fit?

    Could smartphones soon be diagnosing diseases?

    Health Kit and Google Fit have been described as "the beginning of a health revolution"
    Ryanair has turned on the 'charm offensive' but can we learn to love the cut-price carrier again?

    Can we learn to love Ryanair again?

    Four recent travellers give their verdicts on the carrier's improved customer service
    Billionaire founder of Spanx launches range of jeans that offers

    Spanx launches range of jeans

    The jeans come in two styles, multiple cuts and three washes and will go on sale in the UK in October
    10 best over-ear headphones

    Aural pleasure: 10 best over-ear headphones

    Listen to your favourite tracks with this selection, offering everything from lambskin earmuffs to stainless steel
    Commonwealth Games 2014: David Millar ready to serve up gold for his beloved Scotland in the end

    Commonwealth Games

    David Millar ready to serve up gold for his beloved Scotland in the end
    UCI Mountain Bike World Cup 2014: Downhill all the way to the top for the Atherton siblings

    UCI Mountain Bike World Cup

    Downhill all the way to the top for the Atherton siblings
    Save the tiger: The animals bred for bones on China’s tiger farms

    The animals bred for bones on China’s tiger farms

    The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
    A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

    A former custard factory, a Midlands bog and a Leeds cemetery

    Introducing the top 50 hidden spots in Britain
    Ebola epidemic: Plagued by fear

    Ebola epidemic: Plagued by fear

    How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
    Chris Pratt: From 'Parks and Recreation' to 'Guardians of the Galaxy'

    From 'Parks and Recreation' to 'Guardians of the Galaxy'

    He was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star