The government's measures to drive down mortgage rates have proven to be great news for new and existing homeowners. But inevitably they've had a few side-effects as well.
One of these is the hike in ‘booking fees’ or ‘arrangement fees’, as lenders attempt to claw back margins that have been lost to lower interest rates.
Lenders are now enticing borrowers with stunning headline rates, but the high fees attached to these deals often make them deceptively expensive and less competitive than other, less spectacular deals.
Soaring mortgage arrangement fees could offset the gains of the low headline rates.
It could all depend on how much you borrow.
If you are borrowing less, you are more likely to be disadvantaged by a large arrangement fee, even if you achieve a very low rate mortgage.
This is because the saving offered by a lower interest rate is far less on a smaller loan, and the impact of a low rate is unlikely to offset the large arrangement fee, especially if the offer period lasts for just a few years.
Therefore, it is important to weigh up the balance between enticing interest rates and the size of the arrangement fee.
It is often the case that sacrificing a few tenths of a percent in return for a much lower fee could save thousands of pounds, depending on the size of the loan required.
The table below shows the full cost of a number of leading deals over their two-year offer period for different loan amounts, including the arrangement fee.
| HSBC (1.49) (£1,999) | Chelsea BS (1.64) (£1,545) | YBS (1.66) (£1,345) | N&P (1.99) (£295) | |
| £100K |
£11,586 |
£11,302 |
£11,125 |
£10,456 |
| £200K |
£21,173 |
£21.059 |
£20,905 |
£20,617 |
| £300K |
£30,761 |
£30,816 |
£30,685 |
£30,777 |
| £400K |
£40,348 |
£40,574 |
£40,465 |
£40,938 |
| £500K |
£49,935 |
£50,331 |
£50,245 |
£51,099 |
As is clearly evident, for loans up to and even above £200,000, the Norwich & Peterborough mortgage proves to be the cheapest option.
Despite a higher interest rate than its competitors, the lower fee (between £1,050 and £1,704 cheaper than its rivals) has a greater monetary impact for customers taking out smaller mortgage loans.
Only when it comes to larger loans, of around £275,000 and above, does the impact of the lower interest rates offered by the Yorkshire Building Society and HSBC begin to offset the arrangement fee and prove more valuable to a homeowner.
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Borrowing less? Consider a lower fee option.
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Borrowing more? Consider a lower rate option.
Consumers are aware that exceptional rates rarely come without a catch. The trick now is negotiating the right balance between the headline interest rate and the fee involved for the amount that is required.
As the example here shows, a fairly inauspicious deal could prove to be the most suitable, rather than an attention-grabbing table-topper. Shop carefully!
Keith McDonald
Which4U Editor
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