Mortgage lenders are continuing to slash lending rates to attract aspiring homeowners, while pushing up so-called 'arrangement fees' to compensate.
Those with existing equity or a healthy deposit are benefiting from record-low mortgage rates, as a low Bank of England base rate and further government stimuli have continued to drive down borrowing costs.
In the past year, the average cost of a two-year fixed-rate mortgage has fallen from 4.66% to 3.82%, the Independent reported.
But banks appear keen to lock new customers down to longer arrangements, with the average five-year fix falling by a whole percentage point, from 4.86% to 3.86% - lower than the average three-year fix (4.13%).
Nevertheless, banks are compensating for falling rates by pushing up ‘arrangement’ fees, with those at the top end now broaching £2,500.
Mortgage arrangement fees are increasing at seven times the current rate of inflation.
The hike in arrangement fees, also known as ‘booking’ fees, ‘administration’ fees or ‘completion’ fees, remains controversial, as a static economy and low wage growth questions the need to push arrangement costs any higher.
According to financial analysts, Moneyfacts, the average fee charged by five of the UK’s biggest mortgage providers – HSBC, Santander, Nationwide, Halifax and NatWest – has risen from £912 to £1,066 in the past year – around seven times the current rate of inflation.
This gives borrowers something extra to think about with headline rates continuing to fall, as arrangement fees running into the thousands may make the best headline rates less competitive.
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Concerns about new boom-and-bust
There are growing concerns that government measures to slash lending rates could support a unsustainable new boom in the housing market, as the Funding for Lending Scheme and newly-announced ‘Help to Buy’ programmes tackle prompt a surge in activity.
The Funding for Lending Scheme (FLS) continues to assist the residential mortgage market almost exclusively to the detriment of commercial lending.
Concerns are mounting of a return to boom-and-bust in the housing market.
New figures from the Bank of England show that lending has shrunk in three out of the last four months, including a £3 billion drop in April, questioning the effectiveness of the scheme to sectors other than the residential mortgage market.
Meanwhile, the Help to Buy scheme, which is to underwrite over £100 billion in mortgage debt, is expected to push up prices as the supply of new homes fails to match the rise in demand.
A new report from investment bank Morgan Stanley suggests that property prices will rise by between 8% and 13% next year, prompting fears of a return to the boom and bust cycle that propagated the crisis.
Keith McDonald
Which4U Editor
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