If you're thinking of taking out a mortgage in the next year, you need to be careful...
A few years ago the mortgage arrangement fee was exactly that: a fee to cover the administrative costs of, ahem, arranging your mortgage. Typically, it set you back around £300.
In 2004, that started to change. Lenders realised they could secure a coveted slot in the mortgage best buy tables by slashing headline interest rates and craftily bumping up arrangement fees to compensate.
The average fee leapt 40% from £339 to £480 in just a few months, according to brokers John Charcol, and has continued to march upwards ever since.
HSBC recently imposed a stonking £7,699 arrangement fee for the lowest rate on the maximum £250,000 loan in its "mortgage matcher" range. That's nearly £3,850 for each year of the two-year fix – or £321 a month.
Buyers with small deposits are particularly vulnerable. Abbey offers just one deal for those borrowing 95% of property value, a five-year fix at 7.09%, and it carries a punitive £2,499 booking fee.
Unusually, and harshly, Abbey won't let borrowers add the money to their mortgage, but demands the cash upfront. The same goes for HSBC mortgage deals.
Other lenders charge arrangement fees as a percentage of the money borrowed, a practice that can be even pricier for larger loans.
Alliance & Leicester offers a brace of two-year fixes with a 2% "product fee". If you borrow £200,000, that would cost a crushing £4,000 – even if you can offer A&L the bargaining chip of a 25% deposit. Imagine paying £4,000 every two years just for the privilege of getting a mortgage!
Taking advantage
In June, Chancellor Alistair Darling took a pop at lenders, accusing them of "taking advantage" of homeowners by charging arrangement fees up to £2,500.
He expressed concern that hard-pressed borrowers coming off fixed-rate deals were paying fees way above the actual cost of arranging a new deal. He even threatened lenders with an investigation by City watchdog the Financial Services Authority (FSA).
This was shameless grandstanding, because Darling can't do anything about it, and neither can the FSA.
An FSA spokesman told Fool.co.uk the Chancellor hasn't been in touch yet, and they aren’t holding their breath. "There isn't anything we can do. Lenders are free to charge any arrangement fee they choose, provided they make this absolutely clear to the buyer. It's a commercial decision. If customers think the fee is too high, they can go elsewhere."
The FSA's role is to ensure financial services companies behave in ways that are "clear, fair and not misleading". It can't tell them how much they can charge – and doesn't want to. "We would no more ban a lender from charging a £2,500 arrangement fee than tell Barclays bank it can't pay more than 3% interest on a savings account," the spokesman said.
The sky’s the limit
So is there anything borrowers can do about sky-high arrangement fees? Actually, quite a lot. Putting it simply, you can go elsewhere.
As the Council of Mortgage Lenders (CML) has pointed out, nobody is forced to pay an arrangement fee, because fees-free deals still exist.
Nationwide offers a two-year fix at 7.35% on purchases up to 90% LTV, or 6.95% on a 75% LTV. Both deals have no "reservation fee", as the society calls it. Alternatively, you could pay a £599 fee, and get 0.4% off those interest rates.
For remortgages, Nationwide offers a two-year fix costing 7.15% up to 75% LTV and 7.55% up to 90%. Again, a £599 fee knocks 0.4% off the rates.
The One account's standard variable rate (SVR) is a reasonable 6.7% up to 75% LTV, with no arrangement fee.
The drawback with these deals is that you need at least a 10% deposit, and preferably 25%.
Remortgaging rewards
If you're nearing the end of your fix and do not have a 10% equity stake in your home, you might still escape an arrangement fee. You only pay a fee to remortgage, you won't pay a bean if you revert to your lender's SVR. The drawback, of course, is that you could face a nasty jump in your payments. The SVR is likely to be around 2% higher than the most competitive rates available if you pay a fee.
The size of your mortgage will partly determine whether you are better off remortgaging or remaining on the SVR. A hefty arrangement fee can make sense on a larger mortgage, if it secures you a lower interest rate, but it may not add up on a smaller loan.
Conversely, a 2% arrangement fee could prove modest and discreet on a smaller mortgage, but big and ugly on a larger loan.
Basically the way to look at it is: if you save more with a lower rate prove than the cost of the fee, however large that fee is, then you will be better off remortgaging.
The good news
The good news is, if you can’t pay the fee upfront, you may be able to add it to the mortgage. This can be worth doing, if it means you ensure that your monthly repayments reamin affordable. However, it is not a decision that should be taken lightly, as it will cost you even more in the end. You will be increasing the size of your mortgage debt, yousee, so you will pay out more in interest.
Don’t give up
Working out whether you are better off on a low rate and a high fee or a high fee and a low rate can seem complicated. But don’t give up. Work out the total cost of each mortgage deal over the years the deal lasts for. You can do this using our mortgage calculator and adding up the monthly payments, and then adding on the fees. Alterntively, you can speak to a broker at The Motley Fool Mortgage Service and he or she will do it for you.
Arrangement fees may have stumped our Chancellor, but Fools who do their sums carefully can still win out in the end.
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