Mortgage fees hit new highs

While mortgage rates have fallen steeply, lenders have hiked their fees to new heights!

Since March 2009, when the Bank of England's base rate was cut to a record low of 0.5% a year, mortgage rates have plummeted to the lowest levels ever seen.

Today, armed with a deposit of 25%, it's possible to borrow from banks and building societies at rates below 3% a year. In fact, today's mortgage rates are roughly half as high as they were in 2007, before the credit crunch and economic recession rocked the British economy.

A big problem for banks

While ultra-low mortgage rates are great for home owners and buyers, they are bad news for banks and building societies. This is because very low rates translate into lower net interest margins (NIMs) for lenders, which means essentially they get lower returns on their lending. As a result, lenders are always looking for sneaky ways to make us pay more for home loans.

One of the easiest ways to fool the public into paying more is to promote a super-low mortgage rate, backed by very high add-on fees. Many borrowers don't look beyond headline-grabbing interest rates and, therefore, fail to grasp that these 'must have' mortgages are much more expensive than they first appear.

Mortgage fees soar

The average upfront fee charged by mortgage lenders has reached a new high, according to a new survey from Moneyfacts. This table shows how this average fee has soared since 2010:

Source: Moneyfacts

As a result of rising fees, the average mortgage fee has risen by more than seven-tenths (70%) in the past 4½ years to an all-time high of £1,514. Remarkably, this August and September alone, this average has increased by £42 in just two months. Ouch!

Low rates are bait

Of course, the costs of setting up and administering home loans have certainly not risen by 70% since March 2008. In my view, there is no rational reason for mortgage fees to have increased so much, other than profiteering by lenders.

By bumping up their upfront fees, lenders get larger and larger sums upfront, while luring in unsuspecting borrowers with what appear to be very low interest rates. Hence, it's pretty clear that high fees are the price we pay for low rates.

Fixed rates with fat fees

As you'd expect, a significant proportion of home loans with very low mortgage rates charge fees that are well above the market average. Check out these ten mortgages with very high fees:

1) Percentage fees

With percentage-based charges, the fee you pay increases as you borrow more. Therefore, for borrowers with small mortgages, percentage fees can offer a good deal. However, for mega-mortgages, these charges can add thousands of pounds.

2) Flat fees

As you can see, these five-year fixes all charge the same flat fee: £3,990. This is a huge amount to hand over for loan underwriting and administration. Clearly, without these whopping charges, these loans would charge significantly higher fixed rates.

Even worse, by borrowing your fee and adding it to your mortgage, you'll pay interest on this extra borrowing. With interest, mortgage fees could easily double or even triple, making them an even bigger burden.

How to lose with low rates

To show you how you can lose out through low rates, here's one simple comparison of how cheap fixed rates with high fees can be beaten by higher rates with lower fees.

Legal & General Mortgage Club charges the highest upfront fees in the mortgage market. It levies total upfront fees of £3,990 for its five-year fixed rate of 3.59% a year for borrowers with at least a 25% deposit. For a £150,000 repayment mortgage to buy a £200,000 home, this loan has fixed monthly repayments of £758.20 for the first 60 months.

On the other hand, West Brom BS offers a five-year fix at 3.64% a year, 0.05% a year more than the L&G mortgage. This has monthly repayments of £762.24, plus upfront fees of £1,996.

Now let's compare the cost of both loans over five years by adding together fees and monthly repayments. L&G's loan comes in at £49,482, while West Brom's costs just £47,730. In other words, West Brom works out to be £1,752 cheaper over five years.

In short, West Brom's mortgage wins, because its lower fees easily outdo L&G's lower rate over five years. That's why borrowers ignore mortgage fees at their peril.

In summary, when you compare mortgages, be sure to look beyond headline rates to find any and all additional costs lurking in the small print. Otherwise, your lovely new home loan could cost a great deal more than you think!

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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