Mortgage fees under spotlight

Mortgage file

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."

Rising rates

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."

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