Why High Fees Are Fair

You might think that high mortgage fees are always a bad thing, but they can mean more choice and benefit many borrowers.

Mortgage arrangement fees have risen massively over the last few years. Rates on tracker mortgages have trebled in the last year to an average of £750, according to some reports, and fixed-rate mortgages now routinely come with fees of £1,000 or much more.

Some of this rise is down to lenders trying to make more money and widening their overall margins. Of course, this is bad news and lenders increasing fees to increase profit is not fair at all. I'm in no way trying to defend the increasing of profit by stealth we have seen in recent years.

Swings and roundabouts

But there is a difference between a lender increasing its fees to boost its margin, and introducing higher fees to enable it to offer lower rates (however hard it is to separate the two). In my view, lenders offering products with high fees (sometimes extremely high) to offset a very competitive rate is good practice and one method of treating customers fairly, especially when they offer the opposite -- low fee deals with less competitive rates.

Lenders do not always make more money on high fee deals than low fee mortgages -- sometimes they are simply robbing Peter to pay Paul, offering a wider range of options.

And be under no illusion that if arrangement fees were capped by the Financial Services Authority, rates would have to rise to cover that cost -- which wouldn't suit a huge swathe of borrowers.

If you look at the mortgage ranges of most of the big high street lenders they use fees and rates as pricing mechanisms to make up an overall deal. So on a certain deal at a particular risk level - for example a two-year fix at 75% loan-to-value (LTV), they might have two different products, one with a high fee and low rate, and another with a low fee and higher rate.

Even if a particular lender doesn't have a whole host of fee/rate derivations, you can bet that elsewhere in the market another lender does. And at the edges of the market - very small and very large mortgages - these different weightings are very important indeed.

Total cost

For example if you look at Halifax's three-year fixed rates up to 60% LTV there are two options - one has a low rate of 5.64% and a fee of £995, the other has a higher rate of 5.84% and a lower fee of £495. And when you evaluate the products over the three-year period based on total costs (36 monthly repayments plus the fee), the cheapest alters depending on the size of the mortgage.

• On a typical £150,000 25-repayment mortgage, the 5.64% rate plus £995 fee would cost £34,619 over three years. But the 5.84% plus £495 deal would total more at £34,769. Somebody borrowing £150,000 would be better off with the higher fee, lower rate deal.
  
• Those with a large mortgage of £500,000 would also be better off with the high fee deal, with the 5.84% plus £495 costing £114,723 over three years and the 5.64% with £995 over £1,500 cheaper at £113,027.
  
• But borrowers with a modest mortgage of £100,000 would be better off taking the lower fee deal even though it has a higher rate. On the 5.84% deal they would pay a total of £23,339 including the £495 fee compared to £23,404 taking the cheaper rate of 5.64% and higher fee of £995.

This is just one small example in a market of thousands of price combinations, where fees range from zero to £10,000 or more. But it highlights the need to look at overall cost.

The downside of lenders pricing their deals in this way is that it is more difficult to work out what is a good deal. However, a mortgage calculator like the Fool's will help you to work out monthly repayments, which you can simply multiply by the number of months (60 months for a five-year fix for example) and add the fee on top.

Below are a few examples of lenders' high fee and fee-free offerings. Of course, LTV currently plays massive part in product composition, as lenders price much more cautiously for risk based on the size of your deposit.

High fee

Abbey has a three-year fixed rate at just 5.39% up to 70% LTV for those who can afford a fee of £1,499. Unfortunately the deal is only available up to £250,000 but for those who need to borrow up to £500,000 Northern Rock has a broker-only three-year fix at 5.49% with a hefty £1,995 fee.

Fee-free

First-time buyers could benefit from the Co-op Bank's fee-free three-year tracker up to 90% LTV, with a rate of 6.04%, or for those who want to fix and pay no fee, HSBC has a two-year fixed rate up to 75% LTV at 6.24%.

Want no fee and a great rate? It is possible with Woolwich's fee-free 5.79% fee-free tracker but the catch is you need a 40% deposit to get the deal.

All Rounders

Mortgages with a decent fee, rate and LTV can work out good options for average borrowers.

For example, First Direct's term tracker at 5.49% with a fee of £399 is available to those with just a 10% deposit and could suit first-time buyers in particular.

More: Is Your Mortgage Going To Get Cheaper?