Escape extortionate mortgage fees!
That's great news for those who can raise the big deposit needed to get a deal, because ongoing mortgage costs are actually very affordable.
But there is a catch.
%VIRTUAL-SkimlinksPromo%Lenders are clawing back some of these savings from borrowers in the form of enormous mortgage arrangement fees. These fees apply if you get a new mortgage for your first home, if you move house, and often if you remortgage – and they average a jaw-dropping £1,514!!
Just four years ago the average fee was £889 according to financial information provider Moneyfacts, which means that there has been over a 70% increase in the fees since then.
Sylvia Waycot, finance expert at Moneyfacts reckons lenders are being opportunistic hiking their fees so drastically:
"There is no logical reason why fees should have increased so much. Mortgage administration costs can't have jumped 70% in four years. Credit searches are no more complex than in previous years, so why are fees so high?
"It could be that lenders are keen to push fees because they are an upfront cost, which means they get the money at the start regardless of fulfilling the full length of a fixed term.
Of course your lender may let you add the fee onto the loan, but then you will pay interest on that borrowing, which will cost you more in the long run. Either way the lender has still effectively secured that money from the off.
This problem of huge fees is actually holding back the housing market according to some. A significant 60% of mortgage advisers quizzed this week by www.mortgagesolutions.co.uk said that high fees are now becoming a major problem for potential borrowers.
How to escape high fees
Despite the average mortgage fee topping £1,500 many lenders offer a range of fee options, so you can choose a deal that costs a bit less upfront or doesn't have any fee at all.
This could save you a lot of money if you are buying a home, which is seriously useful when your budget may already be stretched.
Of course, lenders don't offer fee-free mortgages without getting something in return, so a lower fee, or no fee, usually means a higher interest rate – and this means your monthly mortgage repayments will be higher than if you were able to stump up a bit more upfront.
So how do you decide which deal is best overall, if you aren't really comparing like with like?
Waycot admits: "Mortgages have always been complicated, but these days that complication has sadly been taken to a whole new level."
Count the true cost
One way to compare mortgages is to work out the true cost over a specific time period. For example, if you want a five-year fixed rate it makes sense to compare the entire cost of deals over five years.
To do this you work out what the monthly repayments will be and multiply them by 60 months (five years). Then add any mortgage arrangement or other fees you need to pay to get the deal.
That way you can see how much two deals with very different fees and rates will cost you in total over that time period. You might actually find that the fee-free deals aren't necessarily the cheapest.
It's worth bearing in mind that the size of your mortgage can have a big impact on whether or not it is worth paying an expensive fee to bag a cheap interest rate.
As a general rule of thumb the more you are borrowing, the more important your ongoing interest rate to the total cost of your mortgage. So a high fee may be worthwhile if it gets you a really good deal.
The opposite is also true. If you are borrowing a modest mortgage, for example less than £120,000, a fee-free deal might be a good option for you, even if it means you have to pay a slightly higher rate of interest. Because you are borrowing a small amount the interest rate premium doesn't have such a big impact.
Of course, you always need to work out which deals suit you best based on your individual borrowing level and attitude to risk.
To each their own
While it is extremely useful to work out the total cost of a mortgage, it isn't the be-all and end-all. Your individual circumstances might dictate whether or not an upfront fee is better for you.
For example, a fee-free deal would help if you have a small savings pot, though it will probably mean a slightly higher interest rate. However, borrowers with high incomes may decide it is worth it.
Alternatively, perhaps you have a large lump sum from an inheritance or following a divorce, but a modest salary. In that case you might be willing to pay a large fee now if it bags you the very best mortgage rate available, because it will keep your ongoing costs down.
As with most mortgage choices, it is entirely down to your preferences and your financial circumstances. Fee-free mortgages are great but, as strange as it sounds, paying an upfront fee can be better for others.
If you are confused about comparing mortgages with varying rates and fees, consider letting a mortgage broker do the hard work for you. They will look at your specific circumstances and search the market to find the most appropriate deal for your needs and preferences.
- Mortgage approvals down 13% in year
- Buy a property without a deposit
- There are only two mortgages worth buying
- Compare mortgage deals