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Calculated bets

Following Mark Harris’s column last week, further comment on high arrangement fees may be helpful. High percentage-based fees came to prominence 18 months ago when The Mortgage Works introduced a buy-to-let 4.99 per cent three-year fix with a 1.5 per cent fee to address the challenge of rental cover requirements at higher interest rates. This resulted in many more landlords being able to borrow 85 per cent than with a normal fee and a higher rate. This mortgage was so successful that many other BTL lenders followed suit and nowadays high percentage or high fixed fees are also common in the mainstream and self-cert markets.

Many consumers find it difficult to work out whether it is worth paying a higher fee to get a lower interest rate and some have a philosophical objection to paying a high fee, even if it means they get better value. However, any competent mortgage broker can easily compare the value offered by a normal fee mortgage with one having a higher fee and lower rate or no fee with a higher rate as, basically, it just requires comparing the results of simple calculations of the fee plus the total interest payable over the period of the deal.

Increased choice means more reason for borrowers to seek independent advice, which surely most brokers would welcome. Halifax’s very low 4.49 per cent fixed rate to December 31, 2008 with a 1,449 fee, only available for purchases up to 75 per cent, is an excellent example of a high-fee mortgage offering good value. In fact, it is the market-leading two-year fix for mortgages over 150,000.

On the other hand, Portman’s 4.48 per cent fixed rate to September 30, 2008 – three months shorter than Halifax – with a 1.5 per cent fee is more expensive than its 4.69 per cent fix with a 999 fee, even at the minimum loan size of 100,000. Having done that simple calculation, brokers can ignore it or sell against it.

Best-buy tables produced solely by computer, with no human input, are useless as any table based on rate alone, even if products with extended early repayment charges are excluded, is likely to be misleading. Moneyfacts bases its best-buy tables, as we do, on true cost over the specified period.

The problem is deciding what loan size to use for the calculation. Moneyfacts always assumes 150,000 on a 25-year repayment basis, which takes account of annual or daily interest calculation. We take a view on the loan size depending on where the table will be published.

Best-buy tables can never be more than a guide as they are not client-specific but brokers have far more comprehensive and up-to-date tools at their disposal. In particular, mortgages with a high flat-rate fee progressively become better value for bigger amounts, whereas with a smaller mortgage needs a low fee or no fee.

This is not rocket science and, as well as high fee options, some lenders offer a choice between paying a fee or no fee with a higher rate.

Ray Boulger is technical director at John Charcol

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