Borrowers can be bamboozled with ‘cheap’ deals that actually see them paying more writes Jeff Salway
Mortgage lenders are hiking their charges and introducing new fees that leave borrowers facing a nasty surprise when the true cost of their home loan becomes clear.
The average mortgage fee has soared by more than £600 in the last 12 months alone, new figures show.
Lenders now charge average administration or arrangement fees of £1,511, up from £878 in June 2009 and £904 a year ago, according to Moneyfacts research for The Scotsman.
The trend, which reflects a recent change of tactics by lenders, poses problems for borrowers comparing mortgages and trying to work out how much they would really have to pay.
Sylvia Waycot, spokeswoman for Moneyfacts, believes that with standard variable rates (SVRs) under close scrutiny and any increases attracting criticism, lenders have instead sought to raise overall mortgage costs by ramping up fees and introducing new charges.
“This is why some providers have chosen to raise the less noticeable mortgage fees instead,” she said. “This is a dangerous policy to follow, as there are several providers that don’t charge any fees; after all, this is only an administrative fee, which makes an average increase of over £600 in a year hard to explain.”
That figure is the administration fee, also known as the arrangement, booking or completion fee, depending on the lender. It doesn’t include other potential up-front lender costs, such as mortgage valuation fees, higher lending charges, early repayment charges (ERCs) and exit fees.
A report last year by consumer group Which? found there were around 40 different types of fee on the fixed-rate and tracker mortgages available, with most mortgage lenders having more than 20 different fees.
The widening range of charges and the different labels they are given by lenders makes like-for-like comparison of mortgages far more complicated and time consuming than it should be.
While some lenders waive fees for certain periods – Clydesdale Bank recently launched fee-free deals for first-time buyers – others promote cheap mortgage rates that come with extortionate charges attached.
Alison Mitchell, head of mortgage management at Robson Macintosh, said: “Fee-free deals are good in that they are clear and transparent, although they may ultimately cost the same as higher charged products.”
For borrowers in Scotland, where home reports continue to operate despite the demise of home information packs – their equivalent south of the Border –there is a particularly unwarranted element to the fees requested, according to Mitchell.
“Some lenders charge for everything – even charging to get a transcript on a Scottish house purchase where there is a home report and the surveyors do not charge for a copy,” she said. “This is ridiculous.”
David Black, head of banking at financial researchers Defaqto, strongly recommends checking the charges not only at the outset, but any others that could be levied at a later stage.
He said: “Any arrangement fee is an integral part of the mix.
“If your intention is likely to be to remortgage when the initial rate period ends then it is helpful to compare mortgages on the overall cost during that period – so look at the interest rate as well as any entry or exit costs.”
Look deeper, however, and the scale of the fees levied can vary significantly between different types of mortgage.
The main increases have been on fixed-rate deals, according to Defaqto. It found that the average fee on a fixed-rate loan has rocketed to £802, up from £547 just 12 months ago.
In contrast, borrowers taking out SVRs over the last three years have seen the average fee fall from £803 to £665.
So while you’ll first be attracted to the headline mortgage rate when looking for a new deal, it’s essential to work out the overall cost by looking at the fees.
To find out the true cost, go to page two of your key facts illustration (KFI) document and look at the APR. This gives the true cost of the mortgage by showing how much you pay back for every £1 you spend.
These documents can seem dry and tiresome but with so many fees hidden in the small print it’s worth spending time flicking through them to work out the total amount you have to repay over the term of the loan.
A high fee may sometimes be worth paying if the interest rate is low enough. It will depend largely on how much you’re borrowing – the larger the amount, the more likely it is that a high fee is worth paying to secure a competitive repayment rate.
Conversely, of course, a high fee will account for a greater proportion of the overall cost of smaller loans, meaning a higher monthly payment may still be better value if the up-front costs are low.
Similarly, the longer the term of the mortgage, the more likely it is that a low interest rate will reduce the overall impact of the charges.
As fees become more complex and vary more widely, the onus is increasingly on borrowers to ask questions and make sure their lender or broker explains anything that isn’t clear.
“You are the person in charge of the decision and deserve the best possible financial solution,” said Mitchell.
“There are literally thousands of mortgage options in the market at any point in time. It is important to cut through any complexity and find the best possible match to your requirements.”
With almost 40 types of fee in the mortgage market, it’s harder than ever for borrowers to compare the true cost of different deals. While some lenders have just a small handful of fee types, several charge more than 20 types of additional fee, according to research last year by Which?, the consumer group.
Here are some of the most common:
ARRANGEMENT OR SET-UP FEES
Basic charge when taking out a mortgage. This is often an umbrella term covering fees that are sometimes levied separately, including booking, application and administration fees. These range from £499 to £2,000, but the average has been rising steadily, with the highest fees typically on the most eye-catching mortgage rates. Lenders will often add the arrangement fee to the mortgage – avoid this and pay it separately if possible or you’ll be paying interest on it.
Range from around £200 to £450 and are charged on the day the borrower moves into their new home. They’re usually levied when there hasn’t been an arrangement fee.
EARLY REPAYMENT FEES
Can provide a sting in the tail for mortgage borrowers who want to leave a deal before the term ends. The amount is based on a percentage of the loan you took out, so it can often be sufficiently chunky to deter borrowers from switching to cheaper deals mid term.
These fees, which tend to be around £250 to £300, differ from early repayment fees in that they are paid when the mortgage is redeemed, usually where the borrower has paid it off or is moving to a different deal.
Levied to cover the additional work associated with a mortgage that has gone into arrears, such as the cost of letters sent out. These are sometimes charged without justification, Shelter Scotland has warned. You can ask for a refund if you believe you’ve been charged arrears fees that exceed the likely cost of the extra work for the lender.
Usually a percentage of the amount being borrowed and are charged by brokers for helping secure a mortgage deal.
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