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The fee market

Mortgage arrangement fees have been increasing steadily over the last two years but the last few months have seen these charges rocket.

A look at the best buy-tables for any type of mortgages except standard variable rates will show arrangement fees starting at £500 and rising rapidly from there.

Abbey is offering a threeyear fixed rate at 5.49 per cent up to 90 per cent loan to value with an arrangement fee of £699 while Bradford and Bingley has a two-year fix at 5.59 per cent up to 95 per cent LTV with an initial fee of £999.

Two years ago, these fees would have been the exception but now they do not stand out from the crowd and, if anything, can look like good value.

HSBC’s much publicised rate matcher has a sliding scale starting at £499 but, depending on the rate quoted, the fee could be much higher. A two-year match for an expiring 4.99 per cent deal on the maximum value loan of £250,000 would cost £1,799 and the lowest rate it guarantees to match could be as high as £4,999.

HSBC spokesman James Thorpe says: “We are trying to offer people, especially with rate matcher, some consistency. We have to use the fee to support the interest rate. Customers can choose to pay the fee and have a lower interest rate or not pay a fee and have a higher interest rate. It should not make any difference to the final cost.”

Hamptons International managing director Jonathan Cornell says: “I do not think lenders are doing anything wrong, they are just funding expenses. The cost of loans is almost 1 per cent above Libor and that is very expensive so they are passing the charges on to borrowers.”

The Mortgage Practitioner sole trader Danny Lovey says: “I think HSBC have scored a major PR coup. From what I understand, a top fee could be £5,000. This does not mean it is not an OK deal but they are building up expectations. I have had three phone calls from clients who have taken the rate matcher at face value. There is a lack of transparency about the fees as no one will know what their fees are going to be until after they have waited a few weeks for an interview. If we all did it, the FSA would not like it.”

London and Country technical manager Richard Morea says: “Profiteers will be found out in the long run. Even before the credit crunch, we saw fees climbing and £999 is now very common.”

The crunch has seen a sharp increase in what was an already rising cost. Morea highlights Alliance & Leicester which has introduced percentage fees on residential deals. For a two-year fixed rate of 5.74 per cent, arrangement fees can be 2 per cent, which means a £250,000 mortgage could see a fee of £5,000.

Morea comments: “A&L are probably not interested in new business. They are just looking to keep products out there but are primarily concerned with trying to look after their present books.

“Lenders are trying to regulate new business. They are experiencing spikes in business and are having to withdraw products to deal with backlogs. Then they reprice and the cycle starts again.”

Lovey says: “Lenders are having great difficulty coping with the processing, not just the funding. They need to sort out the flow and are trying to direct the market through interest rates, arrangement fees or a combination of the two. If they are priced too low, they will not be able to cope with the vast amount of new business.”

The buy-to-let market has also seen similar tactics as lenders try to avoid creating a rush for their funds.

Lynsey Sweales, marketing and PR director of buy-to-let specialist broker The Money Centre, says: “Lenders are trying to stay in the market by not being so competitively priced. Trying to control the gates a bit, if a landlord needs a mortgage they will have to pay the arrangements fees. It is the nature of the market at the moment.”

Cornell says: “If people are seeking advice and working out the figures, it will not necessarily put them off. They may well be happy to pay a big arrangement fee if it gives them access to a low interest rate.”

Morea says there are options available for borrowers unwilling to take a deal with high fees. “If someone is not content to pay the fees on principle, then there are options with zero arrangement fees,” he saysAccording to Moneyfacts, there are around 550 mortgage products without an arrangement fee currently on the market.

Lovey says: “It is horses for courses, you need to weigh up the arrangement fee with the standard rate and decide whether a higher fee is worth a lower coupon rate in the long run.”

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