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Fee market

Abbey’s recent launch of a two-year fixed rate with a £10,000 fee generated a significant amount of media comment. Abbey justified it by saying that it was good value as the fee was cheaper for big loans than the 2 per cent that some of its competitors were charging.

I see nothing wrong in principle with a £10,000 fee, or an even bigger one, if the interest rate and other terms offered are sufficiently good to make the mortgage good value. To take this concept to its ultimate conclusion, if a lender offered a mortgage today with 0 per cent interest for two years and an 11 per cent fee, added to the mortgage, and assuming no extended ERC, it would be the market-leading two-year fix for all loan sizes.

Abbey’s product range includes several two-year fixes but the mortgage in question has a rate of 5.59 per cent, fixed to February 2, 2010. For loans up to £500,000, this rate is available with a fee of £1,499, but for bigger loans up to £750,000, the fee rockets up to £9,999. This immediately suggests the mortgage is poor value for any loan above £500,000. For a maximum increase of 50 per cent in the loan size the fee is increased by 567 per cent.

However, even ignoring cheaper competitor products, a really interesting comparison is with another Abbey two-year fix available on the same basis but with a rate 6.29 per cent, no arrangement fee and a maximum loan size of £2m. Normally, one expects a mortgage with no arrangement fee only to be good value for small loans but this one offers better value than the 5.59 per cent rate with a £9,999 fee, even at the latter’s maximum loan size of £750,000.

Assuming exactly two years, the true cost, including Abbey’s now fixed exit fee of £225, but ignoring valuation and legal fees, of a £750,000 interest-only mortgage at the 6.29% rate with no fee is £94,575. The fair way to compare this with the big-fee mortgage is calculate the interest after adding the fee to the mortgage. Thus, the true cost of a £759,999 mortgage at 5.59 per cent on the same basis is £85,193. However, the borrower needs to repay £9,999 to bring the outstand-ing amount back into line at £750,000 and adding this amount takes the comparable cost to £95,192. Thus, even at its maximum loan size of £750,000, Abbey’s big-fee mortgage is £617 more expensive than another product in its range. Now, if the £9,999 fee mortgage were available up to a loan size of £2m, it would be a different story.

Ray Boulger is senior technical manager at John Charcol

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