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What are mortgage arrangement fees really for?
It can cost up to £2,000 to 'arrange' a mortgage with a lender but what exactly are borrowers paying for?
by Michelle McGagh on Dec 13, 2012 at 11:19
Mortgage arrangement fees can vary from a couple of hundred to thousands of pounds, but if they are supposed to cover the cost of setting up a loan how come they vary so much?
The question of why would a mortgage at one rate cost £1,000 more to process than another is a bit of a red herring because the answer is; it doesn’t.
The truth of the matter is that arrangement fees aren’t technically paid towards the administration of your mortgage. Mortgage arrangement fees are actually linked to the interest rates offered by lenders; the lower the interest rate the higher the arrangement fee.
Arrangement fees are a way for lenders to make some money back on low interest rate offerings.
Nigel Stockton, financial services director at Countrywide Group, which has a mortgage broking arm, said: ‘Arrangement fees are used as a proxy for interest rate charges. [Lenders] will say it covers the costs of the operation that they have backing up the services they provide, including people underwriting and assessing mortgages, and answering the phones,’ he said.
‘In practice however, arrangement fees can be as little as a couple of hundred pounds to £2,000 and products with a higher fee will have a lower rate of interest and those with lower fees will have higher rates – so you can see the balance.’
Check the APR
A spokeswoman for the Council of Mortgage Lenders (CML) said there was a ‘trade off’ between interest rates and arrangement fees, which are either paid as a fixed sum or a percentage of the loan.
She said consumers should look at the APR (annual percentage rate) when comparing mortgages to get an idea of the total cost of the arrangement fee added to the interest rate.
Although higher fees may seem off-putting, they could prove to work out less expensive for those with large mortgages because they get access to cheaper interest rates, which will save them more money over time.
However, lower fees could be better for those with smaller mortgages or those who do not have ready cash to pay a fee.
‘Consumers with cash can afford to pay the higher arrangement fee and get the lower interest rate and those with less cash and looking to delay the cost of the mortgage may take the lower fee but a higher rate,’ said Stockton.
‘Also look at the size of the loan, £2,000 on a £2 million loan isn’t much but £2,000 on a £75,000 mortgage on a home in Swindon where the average house price is £90,000 is more substantial.’
Stockton added that many lenders will allow you to add the cost of the arrangement fee to the mortgage.
‘Lenders will usually let you add the fee on to the loan, however, you have to remember that if you are paying back a £2,000 arrangement fee over 20 years you will pay back more than £2,000,’ he said.
Stockton said that most mortgage lenders offer free valuation and surveys so the cost of the arrangement fee is not affected by ‘added extras’. The CML confirmed that lenders are under no obligation to linke the arrangement fee to a specific cost.
The CML spokeswoman added that some lenders also had additional administration fees that are levied on top of the arrangement fee, which would be shown in the ‘key features illustration’ – a document outlining the details of the mortgage.
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