You run from high rates but then the charges whack you
As fixed mortgages become too expensive, borrowers have been turning to variable deals – where high arrangement fees lurk. By Laura Howard
Sunday 13 July 2008
The rising cost of mortgage rates has hardly been out of the headlines in recent months but a more punishing measure of inflation for homebuyers and remortgagers has largely escaped the consumer radar: mortgage arrangement fees.
Initial charges on two-year fixed-rate deals were hiked a couple of years ago – rising from an average £514 in June 2006 to £968 last month. Now variable-rate mortgages are getting the same treatment. According to figures from the financial data provider Moneyfacts, the average arrangement fee for this type of loan has reached £1,023, compared with £823 just six months ago. This escalation comes as the credit crunch has left banks short of cash and looking to squeeze as much profit out of borrowers as possible.
Darren Cook, head of mortgages at Moneyfacts, explains: "Arrangement fees on fixed-rate deals started to rise rapidly some time ago when the market was so competitive that lenders producing the cheapest rates had to make up the difference in high fees. But now that interest rates on fixed rates are rising [the average two-year deal is today priced at 7.05 per cent], borrowers are rushing back to variable rates, so lenders are whacking charges on those instead to try to boost their financial reserves."
This means that even standard variable rate (SVR) deals – which traditionally came with no fees or tie-ins, in return for the borrower being exposed to the prospect of rising payments – have now been loaded with arrangement fees. For example, last week, Derbyshire building society introduced a £499 fee on SVR lending (7.09 per cent) for new borrowers, while Clydesdale Bank charges them £599 on its 7.14 per cent SVR.
For most borrowers, however, fees and interest rates should be viewed as nothing more than a case of swings and roundabouts, says Andrew Montlake, partner at the broker Cobalt Capital. "Actually, most lenders offer a range of options, meaning borrowers can choose between a lower interest rate and higher fee or higher rate and lower fee. After all, an arrangement fee is just part of the cost of the deal. It doesn't matter to lenders what way round it is; they just need to achieve a given profit margin."
For example, at Nationwide building society, borrowers can choose between a 5.98 per cent two-year tracker deal with a standard £599 fee, and a cheaper 5.78 per cent version that comes with a fee of £1,499. Zoe Stevens, spokeswoman at the lender, says: "As homeowners come off cheaper deals during the year, many prefer the option of keeping down monthly repayments while paying a fee."
A more extreme example of this trade-off arrived last week from broker John Charcol in the form of a two-year tracker mortgage for loans between £500,000 and £5m. The cheapest deal is priced at Bank of England base rate minus 0.01 per cent, which gives a current pay rate of 4.99 per cent. But this comes with a 2.75 per cent arrangement fee, which means that on the maximum £5m loan a borrower would pay £137,500 – a sum that could buy an entire property in some parts of the country. Borrowers can opt for a lower fee of 1.25 per cent but only if they take on the more expensive interest rate priced at 0.74 per cent above base (currently payable at 5.74 per cent). In addition, both deals require a minimum deposit of 35 per cent.
"Generally, bigger fees are worth paying on larger loans as a competitive rate of interest becomes more important the bigger the debt," says Mr Boulger. "The typical threshold under which you should avoid fees is around £150,000. But lenders have clocked this calculation too and now often impose a lending cap on their lowest-priced deals of a typical £250,000."
The length of the mortgage term is also important; quite simply a £1,000 arrangement fee will cost £500 a year on a two-year deal and £200 a year on a five-year deal. This can be be expensive for those borrowing a relatively small sum over a short period, warns Mr Cook at Moneyfacts: "For example, on a two-year fixed rate of £150,000, every £100 you add to the loan [in the form of an arrangement fee] over that time equates to an additional 0.6 per cent on the interest rate."
The complexities in the way loans are structured makes it difficult for borrowers to shop around and compare "best buy" deals, says Mr Montlake. "Consumers are no longer comparing apples with apples; they are comparing apples with oranges."
At least some variable-rate deals remain straightforward. While short-term tracker mortgages have always incorporated fees, open-ended deals can still be picked up free of charge. The Woolwich's lifetime tracker mortgage, for example, is entirely fee-free and comes with no early repayment charge. For borrowers with a 40 per cent deposit or more, the rate has just been reduced to 0.89 per cent over the Bank of England base rate (currently equivalent to 5.89 per cent), although those with a 20 per cent or 10 per cent deposit will pay 1.39 per cent and 1.59 per cent over base respectively.
It's also unlikely that the fees on variable-rate mortgages will rise much further, according to Mr Cook, who says: "There still needs to be a logical incentive to take the risk of a variable rate." However, he adds: "It will take the market another six months to settle down."
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
- 1 Russell Brand accuses FOX News anchor Sean Hannity of terrorism after aggressive Israel-Gaza debate
- 2 Pope Francis issues top 10 tips for happiness – including don’t try to convert other people
- 3 Arturo Vidal to Manchester United: Midfielder set to force through move to Louis van Gaal's Red Devils - reports
- 4 Disney heiress Abigail disowns her share of family profits in West Bank company
- 5 Israel's propaganda machine is finally starting to misfire
The secret report that helps Israel hide facts
Land for gas: Merkel and Putin discussed secret deal could end Ukraine crisis
Woman and two children killed by mob in riots over 'blasphemous' Facebook post in Pakistan
Richard Dawkins tweets: 'Date rape is bad, stranger rape is worse'
Putin is 'thuggish, dishonest and reckless', says British ambassador to US
Boozy, ignorant, intolerant, but very polite – Britain as others see us
- < Previous
- Next >
iJobs Money & Business
£20000 - £24000 per annum: Harrington Starr: A leading provider of web based m...
£28000 - £32000 per annum: Ashdown Group: Secretary (Sales Team Support) - Mat...
Competitive (DOE): Guru Careers: We are looking for an Assistant Management Ac...
£600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...
Day In a Page
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000