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What’s in a name?

Some time ago, a friend of mine came round to my house with a problem. His uncle had just died at 88 and, as my friend had been both the closest relative and only carer for several years, he had been bequeathed a big house in Enfield, North London.

Lucky him. But it also left my mate with a problem he needed to solve. He wanted to rent out the property for a few years. For various reasons too complicated to go into here, he also needed to take out a 110,000 mortgage on it. Could I advise him on how to find the right loan?

While outwardly I told him that, of course, I would be only too delighted to help, my secret reaction, to put it mildly, was to run a million miles in the opposite direction.

Being asked for “advice” by friends, neighbours and assorted rellies is an occupational hazard for many personal finance journalists and it usually ends in tears.

In this particular instance, it became apparent that the intricacies of the issues involved, again too complicated to go into here, meant my friend would benefit from expert mortgage advice, rather than my amateurish fumblings.

So I called a reputable mortgage broker, one who knows that I am a journalist, told him that I was sending my mate over and painted a glowing picture of the broker so that my friend would know that he was getting the best possible guidance on his conundrum.

A few weeks later, my mate came back round my house. As a result of his discussions with the broker, he had been given a choice of two buy-to-let mortgages, both fixed for terms of two to three years. Which was best for him?

This time, I did get involved. Looking through the two proposals from the broker concerned, it became apparent that one mortgage had an application fee of 1,500 and a lower rate of interest over its term while the second came with a much lower application fee and a higher rate of interest.

After doing some sums, it was soon clear that the lower arrangement fee was a better option for my friend, as it would mean smaller overall monthly costs over the fixed period, taking the charges into account. The difference over the period in question was some 400. I advised my friend to go back to the broker, confirm these figures and, if they were right, to choose the loan with smaller up-front charges.

All this came back to me when I read the story in Money Marketing last week that Savills Private Finance managing director Mark Harris wants to see sky-high arrangement fees banned from best-buy tables because the way the tables are presented is usually skewed in favour of lower interest rates and takes no account of higher fees.

I agree with him 100 per cent. As it happens, last week I was also writing a story on the same subject for a newspaper. Coming back to the subject one more time, I remain amazed at the way these up-front charges come under a variety of different names.

Some lenders call them arrangement fees, others define them as application fees and a few say they are reservation or collection fees. How is a borrower to make sense of all these different names?

The other aspect of them that really grates is the way these fees have rocketed in recent years. Now, I understand why that is. Continuous switching by many rate tarts has mean that lenders are finding it increasingly difficult to make money out of their initial offers so they have to charge more at the start to recoup some of their money.

But the net effect of all this is that either there is no discernible difference in the overall cost of a loan between high and low arrangement fees, once different interest rates are taken into account, or if there is a difference, it needs to be calculated taking into account the size of the intended loan and a range of other factors, which now include deed release fees and admin charges for winding up the loan. This is hardly transparent pricing.

This is why, rather than seeing best-buy table banned, I would rather they were to include monthly payment calculations which include the cost of the arrangement fee spread over the term of the deal itself. That would provide a rough measuring stick for borrowers trying to work out which deal is best.

But there is another issue that we should be considering, too. When my friend came round to see me the second time, he came with two sheaves of documents that were almost impossible to understand. It took me two read-throughs before I picked up on the arrangement fees.

Moreover, it still strikes me as odd that the mortgage broker, from a firm that I know is highly rated among its peers, had not bothered to explain the differences and consequences of each loan type. Admittedly, I do not know what type of advice was being given but my mate knows nothing about the subject and I would have thought that the transaction was being effected on an advisory basis.

In those circumstances, it is highly likely that, without my intervention, the more expensive mortgage might have been selected. That leaves me with a sour taste in the mouth. What do other readers think?

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