Mortgage lenders under fire for extortionate fees

Watchdog reckons that mortgage lenders are ripping us off by charging extortionate mortgage fees.

Last week the BBC’s Watchdog programme ran a piece claiming that mortgage lenders are ripping off borrowers with huge mortgage fees.

It argued that while headline mortgage rates may have come down in recent months, lenders’ mortgage arrangement fees have risen, and are now sky-high.

The average mortgage fee has soared 70% in the last four years, according to financial information provider Moneyfacts, from £899 in 2008 to a whopping £1,514 in September of this year.

The other charge made against lenders is that their mortgage fees are presented under a wide range of different names, which is confusing for borrowers.

What’s in a name?

Whether it’s an arrangement fee, product fee, booking fee, completion fee or administration fee, borrowers are increasingly perplexed about what the money actually pays for, and how an average fee of over £1,500 can be justified.

Most people would agree that the fees lenders now charge are not reflective of the actual administration work involved in arranging a mortgage. Lenders themselves admit that not all of their fees are related to the costs of arranging the mortgage.

However, that isn’t to say that large fees are a bad thing. On the contrary, I’m all for them.

Different strokes

All borrowers are not the same, and nor should all mortgages be.

Lenders increasingly use two different pricing mechanisms to make up their deals, rate and fee, because that gives borrowers more choice about how we pay for our homeloans.

So they will work out the overall offering they want to provide and then they will decide how much weighting to put on the fee and the rate.

Sometimes there will be two options, one with a low fee and one with a high one.

In general, the lower the fee the higher the rate, while the lowest interest rates tend to come with higher fees (though there are exceptions).

Some people are happy to pay a large upfront fee in order to benefit from lower rates, for many reasons. Perhaps they have a big savings pot but a low income, so they can afford the high fee and it’s important to them to have low ongoing costs. They are not forced to pay the big fee, because there are many lower fee products available to them, but they prefer to.

Alternatively, others really want to minimise the mortgage fee, even if that means they have a slightly interest rate to pay. First-time buyers who need to put as much of their savings as possible into their deposit will often opt for a fee-free deal to save on the upfront cost, for example.

A diverse mortgage market offers borrowers choice, and reflects the many different types of financial situations people find themselves in.

Plus, not all current mortgages come with sky high fees. Santander told Watchdog that nine out of 10 of its mortgage products have a fee of £995 or less and one in three has a fee of £99 or less. One in four of its products has no fee at all. Halifax also pointed out it has offered 370 different fee-free mortgages in 2012.

And there is another reason why having the ability to pay a high fee is important. It’s all about the level of borrowing.

Size matters

The size of your homeloan can determine which mortgage works out cheapest for you, because the more you borrow the more important the interest rate.

A 0.5% increase in interest rate on a £500,000 makes for a much larger actual increase in payments than it does on a modest £100,000 mortgage. And this means that large loan borrowers often focus on finding the lowest rate, even if that means they need to pay a hefty fee to bag it.

On the flipside, if you are borrowing a modest mortgage, a large fee will really make an impact when you work out the total cost over a set period. After all, a £1,200 fee is the equivalent of £50 a month over a two-year fixed rate!

Here is a good example of why size really matters:

NatWest has a leading fee-free two-year fix at 3.19%, while Santander’s two-year fix at 2.39% is a very competitive rate, but it comes with a £1,995 fee.

A borrower with a small repayment mortgage of £75,000 (over 25 years) would pay £8,712 over two years on the fee-free deal at 3.19% (24 x monthly repayments of £363).

The cheaper 2.39% rate would cost just £7,968 in repayments over two years (24 x £332), but the £1,995 fee takes the whole amount to £9,963.

In other words, for the modest borrower the fee-free deal works out cheaper, despite the rate being higher.

But what about the larger loan borrower with a £400,000 repayment mortgage (over 25 years)?

The fee-free deal at 3.19% costs £1,937 a month, which over two years totals £46,488.

The 2.39% deal costs £1,772 a month – that £42,528 over two years plus the fee of £1,995 means a grand total of £44,523.

For the larger borrower the high fee deal works out cheaper over the two years.

So high fees are not always a bad thing!

This ‘total cost calculation’ allows you to better compare deals on a like-for-like basis and, although it can be difficult to do the sums, many websites will do it for you, including lovemoney.com, which compares deals on a total cost basis over a time period decided by you.

My verdict

I believe it’s a good thing that we still have a broad range of products, from fee-free mortgages to those with high fees and super-low rates.

I am also, of course, aware that some lenders have used fee increases to hike their mortgage costs by stealth, but even taking fees into account, mortgages are currently competitive when you look at the market on the whole.

Lenders should be more consistent about what they call their fees, so that it is clear which cover the administration of the mortgage, and which are in fact part of the pricing package for that deal.

That way we could maintain healthy mortgage choice, without so much confusion.

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At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

Your home or property may be repossessed if you do not keep up repayments on your mortgage

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