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Mortgage fees

Drowning by numbers Jan 2005

Fees, extra charges and hidden extras can take even the most experienced mortgage borrower by surprise. Your immediate instinct when you look for a mortgage is to look at the competitiveness of the interest rate. But even if two loans have the same initial rate, the different fees you could be paying can in fact make an unexciting-looking rate the better deal overall. Fortunately, one of the benefits of mortgage regulation, which began on 1 November, is that the Key Facts Illustration (KFI) now makes it much easier for consumers to compare mortgage deals. By law, you should now be given a document outlining any fees payable on mortgages you are interested in and the impact these have on the overall cost of your mortgage.

What fees?

Though the word ‘fees’ sounds relatively innocuous, the array of different charges you face when buying a property or remortgaging is lengthy. The good news is that they are not all payable at the same time; some are only payable, for example, when you redeem a mortgage. In addition, it may be possible to wrap them up in your mortgage, rather than paying them upfront in cash, although when doing this you should remember that you will pay more overall because you will pay interest on them over an extended period.

While charges such as telegraphic transfers and valuation fees are largely the same throughout the marketplace, arrangement fees vary greatly. They are also often called different names by individual lenders and may be payable either when you apply for a mortgage or when you complete. It is important to find out at the outset whether this arrangement or reservation fee is refundable if you decide not to take out the loan.

Buyer, beware

Historically, lenders only charged arrangement fees for fixed or capped-rate deals, but all this has changed, says Rob Clifford, managing director of broker Mortgageforce. “The fees surrounding mortgages have definitely altered over the last six, let alone 12, months. There’s been a far higher propensity for lenders to charge fees on any product, not just those that are fixed. And some arrangement fees are in the region of £400–£600, rather than a couple of hundred pounds, which was common a year or two ago.”

Indeed, as the box on the right shows, there are products on the market with fees far higher than £600. There are several possible explanations for rising fees. Some attribute it to mortgage lenders covering the costs of mortgage regulation; others say that lenders charge low interest rates to get themselves into the best-buy tables, and then recoup their losses with higher fees.

But despite the upward trend in arrangement fees, high charging is not the rule, particularly among mutuals like building societies. At the time of writing – according to mortgage brokers Charcol – Nottingham, Cheshire and Darlington building societies had deals charging an initial rate of less than 5 per cent with arrangement fees of under £300 (some of these deals also offer free valuation or legal costs). Other regional building societies, such as West Bromwich and Derbyshire, have a good record on fees, particularly if you take into account overall costs such as early-redemption fees, says Rob Clifford. Indeed, Derbyshire encompasses the ethos of mutuality by charging a lower fee on its five and ten-year fixes and its discounted variable rate for existing members (£195) than for new borrowers (£350).

Choices, choices

Abbey’s mortgage range gives borrowers a clear sliding-scale choice over whether to go for lower rates but higher fees. For example, on its two-year tracker product, all borrowers with a loan of up to 75 per cent LTV can choose between:

• BBR minus 0.11 per cent: upfront arrangement fee of £499
• BBR plus 0.14 per cent: no arrangement fee
• BBR plus 0.24 per cent: arrangement fee of £499, but free valuation worth up to £1,100 and free legal costs.

According to Hazel McHugh, group marketing manager for mortgages at Abbey: “What we tried to do with this is say whatever your lifestyle and your life situation, we’ve got a choice for you. For example, when they remortgage, a lot of people withdraw a little bit of equity, so that’s a time at which cash is fairly easy for them to find. By paying that fee upfront they can reduce their monthly payments over the next two years, and the bigger your loan size, the more you stand to save by doing that. But at the other end of the spectrum, where you’ve got people who are moving home because their family is growing or space is tight, and their outgoings are high, paying a slightly higher rate but getting help with legal and valuation fees is really helpful.”

McHugh’s comments are a reminder that because borrowers’ circumstances differ, it may seem that the choice is out of your hands if you just don’t have any spare cash.

But, as the second box shows, with a large loan it may be worthwhile paying a high fee in order to secure a lower rate.

“Looking at these examples of total cost does show that a mortgage deal with a high lender fee is not necessarily a bad deal,” explains Karen Garner at Charcol. “On larger mortgages the lender fee has less of an impact proportionately, and if a low interest rate is the trade-off for a high fee, then the higher-fee mortgage can still be a genuine best buy,” she continues.

Do the maths

As usual, therefore, it comes down to doing the maths. The important thing with any mortgage is to look at the total costs for your particular circumstances and the size of loan you want. It also, of course, depends on what you can afford – you may not mind paying more over the long term if it means you can actually afford to get a mortgage now.

What’s essential is not to leave the issue of fees to chance and, instead, ask for a KFI for every mortgage you are considering, thereby putting yourself in a position to make a judgement on the impact of every single fee on your overall costs. Then you can actually compare like with like and make up your own mind instead of taking recommendations on trust

 

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