Cash: Rocketing fees sink low-interest home loan deals: A 60% rise in arrangement fees is putting people off remortgaging, even when offered rock-bottom rates, writes Hilary OsborneHilary OsborneGuardian
Arise of pounds 500 in mortgage fees over the past 18 months may be putting some people off remortgaging to the new wave of home loans with record low interest rates.
The average arrangement fee on a new mortgage has increased from pounds 920 in February 2011 to pounds 1,472 today, a 60% leap in just 18 months, according to financial data provider Moneyfacts. For anyone in two minds about whether to move away from their lender's standard variable rate (SVR), the thought of writing a cheque that large could be a deal-breaker.
The typical SVR - the rate a mortgage deal reverts to when a special rate has run its course - is currently just over 4%, though some lenders, such as Nationwide, have rates as low as 2.5%. Lenders, keen to get people off these SVRs and on to new mortgage deals, have recently launched fixed rates as low as 2.95%. But in some parts of the country low rates like these are not enough to entice people to switch.
"In my experience, clients are being put off by the higher arrangement fees and feel loth to pay these high fees to the banks," says mortgage broker Daniel Bailey of Derbyshire firm Middleton Finance. "The majority of my clients are based in the north and their mortgages are not as high generally as in the south. Paying the higher arrangement fees may be more cost-effective for clients in the south with higher mortgages."
Bailey says he finds people are "generally led by headline rates they see in the press", which could explain why lenders have been ramping up arrangement fees. While some offer fee-free deals, one is charging as much as pounds 3,990, according to Moneyfacts. That is on a loan for sub-prime borrowers, but in the mainstream rates are also high, particularly on some of the loans with headline-grabbing rates. HSBC's lowest ever five-year fixed rate, which it pulled last week, attracted a fee of pounds 1,495, while NatWest's similar deal has a massive pounds 2,495 fee.
"As a rule of thumb, the larger the mortgage the greater the tolerance to high fees and vice-versa," says Ben Thompson of L&G Mortgage Club. He says mortgage choice is "not as simple as north or south" but "geographically there are trends".
The best-buy mortgages rate-wise certainly look more competitive to borrowers with large mortgages who are likely to be in areas where prices are highest, notably London and the south-east. NatWest's table-topping five-year fixed rate deal has a rate of 2.95% and an arrangement fee of pounds 2,495. Without a fee, the rate is 3.69%. For someone with a pounds 200,000 mortgage it makes sense to pay up as the total cost over five years is pounds 2,000 more on the fee-free loan because of the higher rate of interest.
In contrast, if you have a pounds 75,000 mortgage you will find it cheaper to pay a higher rate and no fee. Over five years, taking that would cost around pounds 800 less than the deal with the lower rate.
Those low-rate loans are also available only to borrowers with at least 40% equity in their homes. In areas where prices have fallen, borrowers may no longer have enough cash to switch to one of them. According to Halifax's house price index, the average price of a property in the north-west has fallen from pounds 153,087 in the summer of 2007 to pounds 122,658 now; even a buyer who was able to put down a 50% deposit back then will now be unable to access the best deals.
"The rates start to step up as you have less equity," says David Hollingworth of brokers London & Country. "Some people will be grappling with whether to fix their mortgage for some security, but if they don't have much equity that may mean paying a rate higher than their lender's SVR - it would be hard to motivate yourself to impose higher payments on yourself in the short-term"."
Figures from the Council of Mortgage Lenders show that remortgaging activity plummeted by 20% in June, although that was before the latest price war among mortgage lenders. Things have been quiet in all areas of Britain, with figures for the first quarter of 2011 showing 85,400 remortgages were approved across the UK, compared with 241,500 in the same period of 2008.
High arrangement fees make more sense for homeowners with more valuable property in the south. Alamy