Banks and building societies have been offering some of the lowest ever mortgage rates in recent weeks – but brokers have warned that nearly all of these deals carry large arrangement fees, which can make them less competitive than they first appear.
Research published this week by Moneyfacts, the financial data provider, showed the average mortgage arrangement fee has increased by £151 over the past year, from £879 to £1,030.
An analysis of current mortgage deals by FT Money has also found that most of the cheapest rates on offer now come with fees significantly higher than £1,000.
Last week Coventry Building Society launched a market-leading four-year fixed-rate of 2.99 per cent but with a fee of £1,999. Similarly, the lowest two- and five-year fixed-rate mortgage deals, both from Chelsea Building Society, at 2.39 per cent and 3.39 per cent respectively, also come with arrangement fees of £1,495.
“With lenders competing on ever lower fixed rates in a desperate attempt to top the “best buy” tables, borrowers must keep a close eye on product and arrangement fees,” warned Melanie Bien of Private Finance, the mortgage broker.
Large fees are charged for the market leading variable-rate mortgages, too. Skipton Building Society is offering a two-year tracker at 1.98 per cent – Bank of England base rate plus 1.48 percentage points – with a £1,995 fee. ING Direct has a two-year discounted variable-rate deal at 1.9 per cent – 1.6 percentage points off its standard variable rate of 3.5 per cent – but also requires a fee of £1,945.
Stephen Smith of Legal & General Network said lenders often use fees to attract the types of borrower they want to take on.
“A low-rate product with a high fee may benefit a borrower with a high value loan – more so than one with an average loan or smaller – and this may be what the lender is looking to attract,” Smith explained.
Mortgage brokers said homeowners must work out the total cost of a mortgage– interest charged plus arrangement fees – to ensure they are getting the cheapest deal for the size of loan they need. Total costs will vary depending on the size of the mortgage.
According to Nigel Bedford of Largemortgageloans.com, Chelsea’s five-year fix at 3.39 per cent – the lowest five-year fix in history– is only the cheapest five-year deal for mortgages above £248,000. He calculates that borrowers seeking less than this will pay less overall by opting for Coventry’s five-year fix, which has a higher rate of 3.60 per cent but a smaller fee of £199.
Coventry’s low four-year fix at 2.99 per cent with a £1,999 fee will work out as cheapest option for most borrowers, as it has the lowest total cost of any four-year deal for loans above £75,000. However, borrowers seeking less than £75,000 will find that Santander’s four-year fix at 3.99 per cent, with a £995 fee and a £250 cashback, works out cheaper over the period
However, the effect of a large fee is seen most clearly in the two-year fixed-rate market. While Chelsea offers the cheapest two-year rate of 2.39 per cent, its £1,495 fee means it will only generate the lowest two-year cost for people borrowing more than £536,000. Anyone borrowing less will be better off opting for Chelsea’s more expensive fixed-rate of 2.69 per cent, because it comes with a £185 fee and £500 cashback.
“The interest rate is more important on longer-term schemes but the fees have a greater impact when the mortgage is shorter, i.e two years,” explained Bedford.
According to Moneyfacts, only 12 per cent of mortgage deals come with no arrangement fees – but mortgage experts said borrowers should also be careful not to be “seduced” by no-fee deals.
For example, HSBC’s lifetime tracker at 2.59 per cent with no fee only works out as the cheapest 25-year deal for people borrowing less than £50,000. ING Direct’s lifetime tracker at 2.39 per cent with a £945 fee would be cheaper overall for mortgages above £50,000.
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