Mortgage fees under spotlight
Alistair Darling has warned mortgage lenders not to take advantage of borrowers by charging unfair arrangement fees.
The chancellor is concerned that some banks and building societies are enticing borrowers with competitive headline rates while at the same time hitting them with arrangement fees of up to £1,999.
He is in talks with the industry regulator, the Financial Services Authority, over what level of charges are justified. He reportedly expressed concern that borrowers are not being treated fairly by mortgage lenders, especially those coming off fixed rates and moving to seemingly more competitive deals.
According to Which?, the average arrangement fee is currently around £936, up from an average of £634 just 18 months ago. However, Abbey currently charges a fee of £2,499 on its five-year fixed mortgage at 7.09%, and a fee of £1,499 on its flexible mortgage range.
However HSBC, the UK’s largest bank that recently extended its ‘ratematcher’ mortgage for borrowers coming to the end of their fixed-rate mortgage, is asking some customers for nearly £10,000 to secure an interest rate equal to their previous deal.
HSBC’s ratematcher was initially marketed as a way of helping cash-strapped borrowers fix their monthly repayments due to significant increases in the rates of fixed-rate mortgage products. But for those hoping to achieve a £120,000 mortgage at 4.94% HSBC now asks for a £3,299 fee, up from £999 four months ago. For bigger loans of up to £500,000, customers will have to pay a £9,999 fee.
Move to percentage fees
According to Richard Morea, mortgage specialist at London & Country, many lenders are now introducing percentage-based fees. For example, the Leeds Building Society has a two-year fixed mortgage at 5.75% with a 3% arrangement fee. Therefore, a borrower with a £150,000 mortgage will pay £4,500 in fees alone.
Morea says: "It has always been important for borrowers to look at the whole package when taking out a mortgage, especially with percentage-based fees as the size of the loan could make it cheaper for them to opt for a higher interest rate elsewhere. It is important that people have the choice between fees and rate, but if they find it difficult to determine which is the right product for them, then they should speak to a mortgage broker."
Mortgage lenders argue that arrangement fees are not compulsory, and borrowers can choose to opt for a fee-free deal if they prefer.
The Council of Mortgage Lenders says that borrowers currently have the choice whether to opt for a lower interest rate, but pay a fee, or vice versa. It warns that if this option wasn't available, mortgage prices would increase.
A spokeswoman adds: “What it is important to understand is the overall cost of the mortgage, taking into account both fees and rates – and the key facts document, given to all customers before they apply for a mortgage, provides this."
Meanwhile, three large lenders have increased rates on their fixed-rate mortgages.
Bradford & Bingley has increased interest rates by between 0.5% and 0.7%, while First Direct hiked its two-year fixed deal by 0.16% to 6.15%. Finally, the Co-op has put up rates on its three-year fixed rate by 0.7% and its five-year rate by 0.9%.
The average cost of a two-year fixed rate has now breached the 7% mark, according to data provider Moneyfacts,
Darren Cook, mortgage expert at Moneyfacts, says the rise is down to increasing swap rates, the interest rates on inter-bank loans. Last week these reached 6.52%, well above the 5% Bank of England base rate.
Cook says: "Any increased cost to lenders in arranging the funds on the money market is passed on to customers. Lenders are also taking an increased margin on top as they price their products for risk.
“The average standard variable rate today stands at 7.02%. With most lenders not charging a product fee for moving onto their SVR, this is becoming a more viable option for many at the moment."
Every mortgage lender has a standard variable rate of interest, or SVR, on which it bases all its mortgage deals, including fixed and discounted rate and tracker mortgages. When special deals come to an end, the terms of the deal usually state that the borrower has to pay the lender’s SVR for a period of time or pay redemption penalties. The lender’s SVR is, in turn, based on the Bank of England’s base lending rate decided by the Bank’s Monetary Policy Committee (MPC). Every time the MPC raises its rate, mortgage lenders generally increase their SVR by the same amount but when the MPC lowers its rate, lenders are often slow to pass this on or don’t pass on the full cut to borrowers.
This refers to the terms of your mortgage and not the interest rate you pay. Flexible mortgages offer the borrower the ability to adjust monthly payments to suit their ability to pay. Although there’s no precise definition of a flexible mortgage, it should offer: interest calculated on a daily basis; the facility to make overpayments at any time without incurring penalties; the facility to underpay; and the ability to take a payment holiday (but these may be only options if you’ve made prior overpayments). Flexible mortgages require you be disciplined in your finances and their main drawback is the flexibility comes at a price as lenders charge slightly higher rates for these types of mortgages.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
A charge some brokers (and, increasingly, lenders) make for arranging your loan or mortgage, either as a flat fee or a percentage of the amount you wish to borrow. In order to look ultra-competitive in the best-buy tables, some mortgage lenders will offer mortgages with an attractive low rate and recoup any losses with a hefty arrangement fee.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.