Mortgage borrowers are being warned against being ‘hypnotised’ by lower interest rates and ignoring the increasingly hefty arrangement fees charged by lenders.
Today, Virgin Money launched two best-buy rates – a 5.09 per cent two-year fixed remortgage deal for those with at least a 40 per cent deposit, as well as a 5.15 per cent rate for those with 30 per cent equity.
However, while the product may appeal to borrowers on the hunt for the lowest rate, they come with an arrangement fee amounting to 1 per cent of the mortgage balance.
This means, for example, that someone purchasing a property with a £500,000 mortgage would pay a £5,000 fee alongside the interest and mortgage repayment.
Hypnotised: mortgage brokers warn that low headline rates only can carry a nasty sting in the tail via a larger arrangement fee
Lenders charging arrangement fees on mortgages is nothing new, but they are usually a fixed amount rather than a percentage, and rarely amount to more than £1,500.
For example, the next-cheapest two-year fixed rate remortgage on the market for anyone remortgaging at present is with Barclays at an interest rate of 5.28 per cent. It comes with a fixed £948 fee.
Andrew Montlake, managing director at mortgage broker Coreco, told the news agency Newspage: ‘Many consumers have been hypnotised by a low headline rate only to find that the fee or associated conditions carry a nasty sting in the tail.
‘Percentage fees can work in some borrowers’ favour depending on the loan amount, but the calculations need to be run and carefully compared.
‘At a time when even mainstream residential lenders are showing a predilection for low rate, high fee products, this is where a professional mortgage adviser could save them hundreds if not thousands of pounds over the course of the loan.’
As well as covering the lenders’ costs, product fees essentially act as a ‘top-up’ profit on mortgages with lower rates.
Sometimes the same lender will offer a number of products, for example, one with a fee and one without. The one with a fee will have a lower interest rate.
This is why it is important to calculate overall mortgage costs with this up-front payment included, as the bigger fee could end up making people worse off.
You can do this using This is Money’s true cost mortgage calculator.
Borrowers can choose to add the fee to the mortgage or pay it off immediately, but mortgage brokers typically advise you don’t pay the fee upfront, just in case the mortgage doesn’t end up going ahead.
Simon Bridgland, director at mortgage broker Release Freedom urged borrowers to not focus on a cheap rate and ignore the overall cost.
He said: ‘Lenders play a cup and ball trick on consumers when gaining direct business, as while a broker will look at the overall cost with clear eyes, the eyes of direct borrowers can often be looking in the wrong direction, namely at the rate rather than the overall cost.
‘This cup and ball trick could claim more victims as fees rise and rates drop, at least for borrowers who go direct.’
Justin Moy, managing director at EHF Mortgages agrees and says it’s dangerous to be swayed by purely the headline rates.
He adds: ‘Choosing a mortgage product without advice, and being influenced by the headline rate, is financially dangerous and really not the way to be dealing with your most important debt.’
Be careful: Mortgage brokers say it’s dangerous to be swayed by the headline rates on offer
Virgin Money’s new product follows the lead of Skipton Building Society in charging a percentage fee rather than a fixed fee.
Earlier this month, Skipton launched four of the lowest-interest two-year fixed rate mortgage deals on the market, with its cheapest deal charging just 3.35 per cent.
However, the deals, which are only available to existing Skipton customers, also come with a whopping 5 per cent fee.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said at the time: ‘A 3.35 per cent two-year fix with a 5 per cent fee should be regarded as a 5.85 per cent deal, with the fee spread over the two years, when comparing with other products.’
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