from next Tuesday borrowers can get half-price arrangement fees at Yorkshire and Clydesdale banks. While it's a gimmicky approach to a major financial decision, it reveals that home loans are beginning to become more competitive and, more crucially, that the focus is moving away from just the headline interest rate on to the total cost of the deal.
The banks aren't the first to slash arrangement fees to encourage borrowers: FirstDirect has been offering mortgages with a £99 fee since last July. But as we hit the prime spring homebuying season, the move signals a new price war, with both new borrowers and remortgagors set to benefit.
The deal cuts the arrangement fee across the banks' range of mortgages from £999 to £499. "We understand the importance of arrangement fees and that's why we're offering half-price fees through to early July," says Steve Reid, of Clydesdale and Yorkshire Banks. "This isn't the first time we have offered this kind of deal, and if it's successful then it's possible that we would extend it to ensure we remain competitive."
FirstDirect says its £99 fee has been a success. "Last year we took the decision to offer low fees across our mortgage range and customers found that the clarity made it easier for them to make their decisions," says Richard Tolchard of FirstDirect.
His mention of clarity raises an key issue. With so many different mortgage deals around, anything which makes it easier to compare deals is good. But as it stands, it's important to look at fees in conjunction with rates. Depending on the size of mortgage you need, you could be better off with a high fee and a low rate, for instance.
"The mortgage fee has more of an impact on smaller loans and shorter terms, whereas with a larger loan, the interest rate becomes more important," says Andrew Hagger of Moneynet. "It isn't as simple as referring to a best buy table, especially as some lenders still launch attention-grabbing interest rates, hoping that it will be sufficient to win custom from those who don't take the time to shop around or use the services of an independent financial adviser or mortgage broker."
For that reason it's important to be wary of half-price fees, warns Drew Wotherspoon of John Charcol. "Taken at face value, the thought of a mortgage lender offering anything at half price seems both appealing and surprising. But, as ever though, the devil is in the detail. The arrangement fee is only one aspect to take into account when considering the right mortgage, with the size of your mortgage and the actual interest rate equally as important. It is vital that borrowers work out the total cost of a loan over the period," he says.
Melanie Bien, of the independent mortgage broker Private Finance, agrees that borrowers should look at the total cost of a deal, and not be swayed by a half-price offer. "When homeowners are struggling with higher living costs and worried about rising interest rates, a half-price offer on mortgage arrangement fees is bound to be attractive. However, borrowers must work out the total cost – rate plus fees – when comparing mortgage deals. "While Clydesdale and Yorkshire are slashing their fees, their rates are significantly higher than the best buys in the marketplace, so borrowers who are tempted by lower fees may end up paying more in the long run."
For example, if you were to take a 90 per cent LTV five-year fixed rate for £200,000 with Clydesdale at 6.69 per cent, you would pay a total of £82,939 over five years, including the £499 arrangement fee. However, Manchester building society offers a five-year fixed at 6.25 per cent for an upfront fee of just £100 more. It means borrowers would pay £79,739 for the five-year period, a total saving of £3,200.
Another lender launching a range of new deals this week was the Coventry building society. However, while some of its mortgages have no arrangement fee, the charge could be as much as £1,999.
"When pricing our mortgage range we focus on providing choice for our members," explains Colin Franklin of the Coventry. "For example, borrowers who need a large mortgage may benefit from a flat arrangement fee, while a borrower who has a smaller loan wouldn't want to pay a large fee to remortgage."
He advises borrowers to look at the whole cost of a mortgage as well as considering the lenders' SVR at the end of the discounted period.
But Andrew Hagger says the range of deals is confusing. "Banks and building societies continue to develop products with profit margins based on various rate and fee combinations but while it may work for them, for the person on the street it's just a big headache," he says. "The sensible option is to sit down with an independent professional adviser to help sort through deals and ensure you don't make what could be a potentially expensive mistake."
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