Mortgage borrowers warned against cheap rate loans that come with hefty arrangement fees
- Some lenders now charge a percentage of the mortgage balance as a fee
- Typically, buyers pay a fixed amount regardless of how much they borrow
- Virgin today launched a competitive rate, but with a 1% fee
Mortgage borrowers are being warned not to be ‘hypnotized’ by lower interest rates and ignore the ever-increasing transaction fees charged by lenders.
Today Virgin Money launched two best-buy rates: a two-year remortgage deal of 5.09 per cent for those with at least 40 per cent equity, and a rate of 5.15 per cent for those with 30 per cent equity.
Although the product may be attractive to borrowers looking for the lowest interest rate, it does charge a transaction fee of 1 percent of the mortgage balance.
This means, for example, that someone who refinances a property with a £500,000 mortgage will have to pay a £5,000 fee in addition to the interest and mortgage repayments.
Hypnotized: Mortgage brokers warn that low nominal rates could deliver a nasty sting in the tail only through a higher settlement fee
Lenders charging arrangement fees on mortgages is nothing new, but these are usually a fixed amount rather than a percentage, and rarely exceed £1,500.
The second cheapest two-year fixed rate remortgage on the market for anyone currently remortgaging is with Barclays, at an interest rate of 5.28 per cent. There is a flat fee of £948.
Andrew Montlake, managing director at mortgage broker Coreco, told news agency Newspage: ‘Many consumers are hypnotized by a low headline only to discover that the fee or associated conditions have a nasty sting in the tail.
‘Percentage fees may work in favor of some borrowers depending on the amount borrowed, but the calculations must be done and compared carefully.
‘At a time when even mainstream home lenders are showing a preference for low-interest, high-fee products, a professional mortgage adviser could save them hundreds, if not thousands, of pounds over the course of the loan.’
In addition to covering lenders’ costs, the product fees essentially act as an additional profit on lower-interest mortgages.
Sometimes the same lender offers multiple products, for example one with a fee and one without. Those with compensation have a lower interest rate.
That’s why it’s important to calculate the total mortgage cost, including this upfront payment, because the higher fee could ultimately leave people worse off.
You can do this using This is Money’s mortgage calculator.
Borrowers can choose to add the fee to the mortgage or pay it off immediately, but mortgage brokers typically advise against paying the fee up front, in case the mortgage ultimately falls through.
Simon Bridgland, director at mortgage broker Release Freedom, urged borrowers not to focus on a cheap rate and ignore the overall cost.
He said: ‘Lenders are playing a game with consumers when they bring in direct customers because while a broker will look clear-eyed at the total cost, the eyes of direct borrowers can often look in the wrong direction – at the rate rather than the total cost.
“This cup-and-ball ploy could claim more victims as fees rise and rates fall, at least for borrowers who switch immediately.”
Justin Moy, director of EHF Mortgages, agrees, saying it is dangerous to be influenced solely by nominal interest rates.
He adds: ‘Choosing a mortgage product without advice and being influenced by the nominal interest rate is financially dangerous and really not the way to deal with your most important debts.’
Be careful: Mortgage brokers say it’s dangerous to be influenced by the interest rates on offer
Virgin Money’s new product follows Skipton Building Society’s example by charging a percentage rather than a fixed amount.
Earlier this month, Skipton launched four of the lowest two-year fixed rate mortgage deals on the market, with the cheapest deal charging just 3.35 per cent.
However, the deals, which are only available to existing Skipton customers, also come with a whopping 5 percent fee.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said at the time: ‘A two-year fix of 3.35 per cent with a 5 per cent fee should be viewed as a 5.85 per cent deal, with the fee spread over the two years. , compared to other products.’
