Mortgage fees on the rise

Don't get sidetracked by interest rates and fail to spot less obvious home loan costs, warns Stephen Pritchard

Interest rates might seem to have peaked - with the Bank of England leaving its base rate on hold last week, but other costs associated with buying a home appear to be rising inexorably. The fees levied by banks and building societies for arranging a loan are especially prone to inflation. While lenders compete fiercely to attract remortgage customers in particular, with deals such as free valuations, these may well be more than offset by other, compulsory fees attached to the loan.

Interest rates might seem to have peaked - with the Bank of England leaving its base rate on hold last week, but other costs associated with buying a home appear to be rising inexorably. The fees levied by banks and building societies for arranging a loan are especially prone to inflation. While lenders compete fiercely to attract remortgage customers in particular, with deals such as free valuations, these may well be more than offset by other, compulsory fees attached to the loan.

So-called arrangement or booking fees are most usually associated with fixed, capped or discount deals. The fees allow lenders to charge - and publicise - a more attractive interest rate, but to claw back some of the lost profit through the higher fees.

Over the period of a fixed or discount deal, mortgage fees have a similar effect to paying a higher rate of interest. David Hollingworth, a director at mortgage broker London & Country, says that the charges can be significant. "Paying a £499 fee as opposed to a £299 fee on a two-year deal effectively adds 0.1 per cent to the pay rate on a £100,000 interest-only mortgage," he explains. And fees have risen steadily over the past few years, especially on lower-interest-rate mortgages. Whereas two or three years ago arrangement fees for fixed-rate mortgages were about £300, they have now moved to between £400 and £500 on the mortgage with the most attractive interest rates.

Abbey has a two-year tracker mortgage with an attractive rate of 4.44 per cent, but the arrangement fee is £499. For a fixed rate for five years with the Portman, at 4.8 per cent, the arrangement fee is £500. Among the most expensive, when it comes to fees, are mortgages from Northern Rock, where the general fee is now £595 and, for some deals, as high as £695. Even Nationwide, one of the most transparent lenders, has increased its fees four times on fixed and tracker loans since 2003. It now charges £389 to arrange these loans.

In most cases, though, borrowers can trade off a higher upfront fee against a higher interest rate. Northern Rock, along with Halifax and Abbey, has a range of mortgages with a higher basic interest rate and lower fees. And most lenders have arrangement-fee-free mortgages, especially their standard variable rate loans.

A mortgage advertised at, say, 4.89 per cent rather than 4.99 per cent looks more attractive. But home-buyers only have themselves to answer to if they fail to read all the small print, including the cost of any upfront fees.

These calculations are not straightforward. The exact impact of a higher fee or a higher interest rate will depend on the size of mortgage and how long a homebuyer plans to stay with the lender, as well as the fees and rates themselves.

"These higher fees do not necessarily make the product a bad deal, but they do need to be factored into the value and this will be individual to the borrower," says Mr Hollingworth. "For example, the impact of a bigger fee on a two-year mortgage is greater than on a five-year mortgage. Those with a smaller mortgage will suffer more from larger fees than borrowers with a big mortgage."

For a large mortgage, a high fee of £500 or more could well be an acceptable price to pay in return for a lower rate of interest. Five-year fixed-rate mortgages are starting to look attractive once again, as lenders come to the view that long-term interest rates are falling. A borrower looking for £100,000 or more over five years should be able to absorb the cost of any arrangement fees during the period of the fix. A borrower taking out a small loan will have less chance of recouping higher fees through a lower interest rate, as the discount will make less of an impact on their monthly payments.

And buyers who plan to remortgage in the short term - or have to, because they take out a short-term deal - should pay attention to arrangement fees. Paying two sets of fees in a five-year period could work out more expensive than staying with one lender, even on a slightly higher mortgage rate.

Since the Financial Services Authority took over mortgage regulation last autumn, lenders have been obliged to produce clear statements of costs associated with a mortgage. This makes comparisons easier. Buyers should use this information to work out whether a loan with a large upfront fee is worthwhile. Alternatively, a mortgage broker will be able to calculate the best deal, but buyers should be aware that brokers can charge up to 1 per cent of the mortgage in their own fees.

Borrowers should be wary of adding fees to the mortgage, even if the lender makes this seem easy. Adding fees to mortgage means paying interest, possibly for as long as 25 years. If possible, it is cheaper to pay fees in cash.