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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

What are mortgage arrangement fees really for?

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.

12 comments so far. Why not have your say?

SJB

Dec 13, 2012 at 17:21

All seems a bit ambiguous.....where's Hector Sants when you need him. He would soon sort it out.

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Anonymous 1 needed this 'off the record'

Dec 13, 2012 at 17:30

This is a scam. Govt. should clamp down on this practice. How on earth can they justify £2000 just to arrange a mortgage?

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John Ness

Dec 13, 2012 at 19:26

It's wierd that people accept these charges. They should be banned by government. How would you feel if every time you bought a newspaper the newsagentcharged you 20p arrangement fee for arranging to sell you the newspaper or the supermarket charged you £5 arrangement fee for arranging to sell you your shopping. It is time that the government looked at this.

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bigand

Dec 13, 2012 at 21:02

Take some of the low deals on offer today, 2.79% fixed over 5 years. Presumably the lender will not make too much money out of that deal so to sweeten it they get the the arrangement fee. So this favours people with large mortgages, if we forced no arrangement fee then the mortgage interest rate would increase thus changing the balance. If you are an intelligent borrower you can calculate these figures in and work the best deal out for yourself. To call it a scam is well garbage, it is a business model. Where is the scam if you get the calculator out.

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Forestbhoy via mobile

Dec 13, 2012 at 21:49

One mans business model is another mans scam ....

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Dennis .

Dec 13, 2012 at 21:49

Don't people recognise a business model when you see one?

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John Ness

Dec 18, 2012 at 12:29

As they know very well, not everyone is "an intelligent borrower" and they exploit this lack of financial awareness by offering a low headline rate with a large arrangement fee (which they usually stick on the mortgage so they can charge interest on it for 25 years) in pretty much the same way as payday loans companies exploit their customers lack of financial awareness. If it is an arrangement fee it should reflect the cost of arranging the loan. If it is a method of clawing in money to compensate for an advertised low interest fee they should call it so. My point about charging a fee to sell you a service on which they make a profit which is unacceptable in most other areas of commerce remains valid.

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bigand

Dec 18, 2012 at 13:23

John, is that not where the APR is supposed to point you to a closer judgement ? Perhaps they should give you choices no fee but a higher rate or free and a lower rate and you can make your own mind up.

Perhaps they should give examples such as total cost over the life of a mortgage with fees to help people understand.

I am only against regulating this because the losers will be those on higher value mortgages where the fee is very small in comparison to the mortgage. But even if there is no fee for many people there are other costs to take into account so the headline rate is not the only story, so for those that cannot work out the true cost with a fee what chance have they with solicitors costs, early redemption penalties etc.

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John Lacy

Dec 19, 2012 at 14:38

Bigand---I'm afraid the APR quoted on mortgages is virtually useless.

It is calulated on the special deal that you are getting for the initial couple of years and then on the standard rate for the remainder of the term--any change in the variable interest rate renders the initial APR quote hopelessly inaccurate. The only time that the APR would mean something is if the mortgage was fixed at the initial rate for the whole mortgage term.

As mentioned above the arrangement fee is just the lender taking their profit up-front.

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bigand

Dec 19, 2012 at 15:38

John, APR - good point well made.

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Martin Hicks

Jan 23, 2013 at 18:59

It seems to me that the real argument is that it makes it more difficult to compare offers from different lenders. I would prefer to see the monthly payment per £10,000 in relation to the total term (or at least for any fixed rate initial period).

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philip gosling

Feb 16, 2013 at 16:32

A leopard never changes its spots until it is forced to!! So why expect Banks to look after their customer's interests - when have they ever done that. The fee is simply to fill their pockets at the expense of the unsophisticated customer.

It is the small borrower normally the poorer person who takes a small mortgage that in effect subsidises the large mortgage and that is morally wrong. So I think once again the greedy banks should be forced to 'do the right thing' by law.

You should be able to tell how much a mortgage costs for next 25 years in comparison to every mortgage on the 'high street' and APR does not do that - so design a comparator for £75,000, £100,000 and £250,000 mortgages so people can tell at a glance what the monthly cost will be.

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