Mortgage rates low but arrangement fees increase

Halifax, Santander and Natwest are just three of the big lenders who’ve recently signed up to a new scheme to make mortgages cheaper and more widely available. They’re now trying to tempt buyers with low headline interest rates. But as Rosie Millard reports, whilst rates may have come down the charges for the accompanying ‘arrangement fees’ have hit the roof.

Published 17 October 2012:

When the credit crunch hit in 2008, lending froze and it was virtually impossible to get a mortgage. High interest rates and the banks’ reluctance to take risks has kept the housing market in the doldrums ever since. But now the eye-catching deals are back. With a decent sized deposit you can now find mortgage deals offering rates that are lower than 3%.

But there’s a catch. Though rates have tumbled since 2008, in that time the average arrangement fee has soared by 70%.

These increases come despite the introduction of the Bank of England’s new Funding for Lending Scheme, a programme set up to try and kick start the property market and make mortgages more affordable. Even though 13 banks and building societies have signed up for it, the arrangement fees are still rising.

Take Halifax, for example. Whilst they dropped one of their deals to offer a two-year mortgage with interest fixed at 2.44%, they raised their arrangement fees by £500 at the same time, asking customers with a bill £1,995.

Santander charge even more. They slashed their five year mortgage deal from 3.79% to 3.19% but raised fees by a third, leaving buyers with an arrangement fee bill of £1,495.

So although some lenders say they’re trying to make it easy for us to buy at the moment, in reality getting on the property ladder is just as difficult as it’s ever been.

These fees go by lots of different names. Some lenders refer to them as arrangement fees, others as product fees, booking fees, completion fees or administration fees. No matter the name, one question remains – what exactly are we paying for?

Fees have increased so much over the years that it’s becoming harder to justify how the fee is representative of the administration costs involved, explains Clare Francis, mortgage expert from Moneysupermarket.

“The fee is being used as now a pricing leaver, and a way for lenders to be able to manipulate and be able to have greater flexibility in what rate they offer because if they offer a lower interest rate, they can hike their fee a bit so actually it doesn't cost them any more to offer that mortgage. Some consumers are led by the low headline rate and ignore the fee,”

So if you want to avoid being stung, you need to work out what’s cheaper - a high interest mortgage with a low fee or a low interest mortgage with a high fee. There can be a big difference - just ask Dr Kit Yates, Mathematical expert.

“Say you have a £100,000 and two different deals which are fixed for 2 years. The first option with lender A is an eye-catchingly low rate of 2.44% but it does have a hefty fee arrangement fee of £1995. Your second option with lender B is a higher rate of 2.99% but there’s no arrangement fee.”

“Once you’ve done the maths and factored in the fee, it turns out that you’d end up spending £1320.84 more on lender A’s mortgage than lender B’s over the course of the two years.”

So the lesson is clear. Before being tempted by a low rate, check the fee and do your sums.

Company Responses

 

A spokesperson from the Council of Mortage Lenders says,

Mortgage fees

It is important to recognise that there is a distinction between some fees or charges that relate to administrative costs, and other fees that form a core part of the pricing of the individual mortgage product on offer.

The latter fees - often called product fees - are often calibrated against the interest rate payable. So lenders may offer a variety of different mortgages, some of which are higher rate/lower fee, with others lower rate/higher fee.

The benefit of offering some mortgages with fees and some without, and with fees at different levels, is that different customers can choose the combination that best suits their needs and preferences.

There are various regulations that exist to protect consumers, and to ensure that they can shop around for different mortgages on price, even if their fees and charges differ.

One of these is the APR (annual percentage rate of charge), which takes account of not just the mortgage rate, but also any compulsory fees and charges associated with the mortgage. This must be clearly stated on advertising. The lower the APR, the lower the total cost of credit.

The other - and a very important document to the mortgage customer - is the Key Facts Illustration (KFI), which is a personalised illustration spelling out all the costs and characteristics of the mortgage that the customer plans to apply for, before they submit a formal application.

As long as lenders comply with these rules that make all the costs transparent, consumers benefit. They get a choice of different mortgages, can decide what rate/fee combination they prefer, and get a highly detailed description of all the costs and characteristics of the mortgage they plan to apply for before they are committed to it.

Funding for Lending

Consumers are currently benefiting from historically low interest rates. Many existing mortgage holders, as well as those entering the market, are borrowing far more cheaply than previous generations of borrowers.

However, in the wake of the financial crisis regulators have adopted a far tighter approach to the risk management measures that they require lenders to adopt. One of the ways this feeds through to mortgages is that lenders have to hold more capital (akin to rainy day funding) and liquidity (ability to replace quickly any funding that they lose, for example if savers withdraw deposits from a bank). The riskier the lending they undertake, the more capital they have to hold.

These factors, as well as the underlying ability and cost of borrowing from savers and from the money markets to raise the money that enables them to lend, affect lenders' decisions about how much to lend, and at what rates, and on what kind of loans.

One of the things that the Funding for Lending scheme does is to try to offset some of the increased constraints on lenders that now apply. While designed to make the financial system safer overall, these also tend to pull against the wider economic benefit that would come with increased lending to enable households and businesses to contribute to economic recovery and growth.

The scheme is likely to help, although it is important to remember that the Bank of England has said that, without the scheme, lending was likely to contract (and may still do so). So reducing the extent of that reduction in lending, or achieving even modest growth in lending, may mean that the scheme is regarded as successful.

For lenders who use the scheme, and who increase their lending as a result, the cost of borrowing for that new lending is likely to be relatively cheap. This will be one of the factors that influences the pricing that lenders offer to borrowers. But it is not the only factor, and it does not change the fact that the overall way in which the mortgage market now operates (including the effects that regulation creates) is different to the past.

The more risk-averse environment, compared to the market before the financial crisis, is likely to mean that pricing will remain more "risk-based" than in the past, and expectations about what impact the FLS can achieve need to be seen realistically in the context of a market where demand, just as much as supply, remains relatively muted.

 

A Santander spokesperson says,

“Santander is committed to supporting the housing market and has reduced rates across its mortgage range in recent months. In September, Santander announced that it has accessed £1bn of funding under the Funding for Lending Scheme (FLS) as the first tranche of around £9.5bn it is eligible to draw. However, Santander has been reflecting the benefit of FLS in its mortgage pricing since July, and it will continue to help the UK’s families and businesses over the coming months and years, as helping them will allow the UK economy to prosper.”

Since April this year have you cut any of your rates? If so, which products?

In recent months we’ve made significant reductions and launched new mortgage products across the range with cuts of up to 0.6 per cent. Since April this year, we have withdrawn products and launched similar products offering either a lower rate or lower fee or increased loan-to-value (LTV) or a mixture of these. An example of this includes our popular 2 year fixed (comparable deal) available direct to customers in branch or over the phone:

01/04/12: 2 year fixed at 3.09% and £995 fee (max 60% LTV)

10/10/12: 2 year fixed at 2.79% and £995 fee (max 70% LTV)

We have also increased the variety of competitive higher loan to value (LTV) products available, offering fixed rate products available up to 90% LTV. Our Tracker products remain extremely competitive with many mirroring Fixed product pricing, unlike a number of our competitors.

Providing customers with choice is important – some customers prefer to pay a larger fee to secure a lower rate and lower monthly repayments.

What proportion of these products has also had the fees cut?

As above, in recent months we have withdrawn products and launched similar products offering either a lower rate or lower fee or increased loan-to-value (LTV) or a mixture of these.

We have a significant number of products – 92.1 per cent of our range – which carry fees of less than £1000 (nine in 10 products has a fee of £995 or less whilst one in three products has a £99 or less fee. This is more than we offered 12 months ago where 89.1 per cent of products had a fee of £999 or less*. We also have a full range of £0 fee products – one in four products from our range has NO fee compared to more than one in eight products in 2008 – for customers who prefer that route. Providing customers with choice is important – some customers prefer to pay a larger fee to secure a lower rate and lower monthly repayments.

*Please note that Santander no longer offers mortgage products with a £999 fee.

What proportion of these products has included increased fees?

As above, in recent months we have withdrawn products and launched similar products offering either a lower rate or lower fee or increased loan-to-value (LTV) or a mixture of these.

Are the decreased rates a result of the Funding for Lending scheme? If not could you describe the other factors which have enabled you to cut rates?

There has been increased activity in the mortgage market recently, supported by the lower cost of funding or swap rates as opposed to Funding for Lending Scheme (FLS) which has yet to be fully accessed by many lenders, and this is good news for borrowers. As a responsible lender, we are committed to supporting the housing market and have reduced rates across our range in recent months to support borrowers looking for a great deal. We constantly review our offering and continue to support the market with our comprehensive range of competitively priced products that best meet the needs of our customers.

How do you hope to pass on the benefits of the Funding for Lending scheme on to your customers?

We have been reflecting the FLS in our mortgage pricing since July, offering borrowers a range of competitively priced mortgage products, via direct and intermediary channels, with the option to choose fee or non-fee products. We will continue to help the UK’s families and businesses over the coming months and years, as helping them will allow the UK economy to prosper.

Has the cost of setting up and administering mortgages risen since March 2008?

The cost of funding and swap rates are key factors reflected in the cost and pricing of mortgages. As a responsible lender, we have been and remain committed to supporting the UK housing market. In recent months, the lower cost of funding and swap rates have enabled us to reduce rates across our range helping support borrowers looking for a great deal. We constantly review our offering and continue to support the market with our comprehensive range of competitively priced products that best meet the needs of our customers.

If not, how do you justify any increase in fees?

Santander has not increased its fees. As above, in recent months we have withdrawn products and launched similar products offering a higher rate/lower fee or lower rate/higher fee. Providing customers with choice is important – by offering a selection of mortgages some with or without fees, and with different levels of fees, customers can choose the combination that best suits their needs.

Which of your products offer the lowest and highest fees?

We have a broad range of £0 fee rates – one in four products from our range has NO fee. On our current range the highest fee (excluding % fee which depend on loan size) is £1995, of which there are currently two products. Higher fee products come with a lower interest rate so are of interest to customers with higher loan sizes (where a £0 fee set up is generally not as attractive).

Your website says: ‘By choosing a product with a booking fee you will normally secure a lower monthly payment during the benefit period’. Do you think this clearly explains to consumers precisely what the charge is for?

Yes. All of our mortgages sold through Direct Channels are on an advised basis so this is just preliminary information.

Where customers contact us to apply, part of that advice process is a full explanation of potentially suitable products including a comparison of rates and fees. Where sales are made through a mortgage broker/intermediary, they provide this advice and will be familiar with the different fees that may be charged by different lenders (e.g. £0 fee, £fixed fee, %fee). Brokers also use Sourcing Systems (e.g. Trigold) which will show calculations such as ‘total to pay’ which provides a view of the total costs (repayments + all fees) and accounts for any lender discounts such as free valuation for mortgage purposes or cashback, available on many Santander mortgages – more important than just looking at one aspect such as fee in isolation.

Providing customers with choice is important – some customers prefer to pay a larger fee to secure a lower rate and lower monthly repayments.

Are you able to explain what services you provide to justify the prices you charge for your mortgage arrangement fees?

As previously stated, providing customers with choice is important – some customers prefer to pay a larger fee to secure a lower rate and lower monthly repayments. The ‘Mortgage Arrangement’ or ‘Booking’ fee is not linked to administration costs but instead to the mortgage product’s price, thus a larger upfront fee will be required to secure a lower rate and lower monthly repayments. Higher fee products come with a lower interest rate so are of interest to customers with higher loan sizes (where a £0 fee set up is generally not as attractive).

Can you explain to us why the cost of these activities is out of proportion to the rate of inflation?

The price of the ‘Mortgage Arrangement’ or ‘Booking’ fee versus the mortgage product rates will vary dependant on market conditions. There is no direct link to the rate of inflation.

A spokesperson from Halifax says,

1. Are you able to explain what services you provide to justify the prices you charge for your mortgage arrangement fees?

It is important to recognise that there is a distinction between product fees and fees that relate to the administration costs of the mortgage. The administration fee takes into account the cost of setting up the mortgage and the administration of the mortgage over the duration of the term. The product fee is part of the core pricing element of the mortgage product and reflects lending risk.

We have simplified our approach to mortgage administration fees for our customers. The mortgage administration fee takes into consideration setting up the mortgage and the ongoing administration during the mortgage term. In instances where a fee is charged, it is flat rate of £265, which is payable at the end the mortgage with no interest charged.

On product fees, in response to customer needs we offer customers the choice of a wide range of mortgage products at any given time, providing them with a varied product range. Our research and experience tells us that some customers prefer to pay an upfront fee in exchange for a lower monthly payment whilst others prefer to keep initial costs low in exchange for a slightly higher monthly cost during the mortgage term. It also depends on the customers’ average loan size as to which fee option is more suitable for them. We currently have in excess of 127 products that have a low/no fee option, which ensures that customers have choice and flexibility. Over the past 12 months, where a product fee has been charged, the average product fee was £490 for customers who have taken out a mortgage directly through a LBG branch – a decrease of 18.5% on the previous year.

2. Can you explain to us why the cost of these activities is out of proportion to the rate of inflation?

Our fee structure has not increased over the past few years, and as such is actually proportionally lower when measured against inflation. Where we are able to, we reduce the fees on mortgage products or omit them entirely. This year, we have offered in excess of 370 mortgage products that have been fee free. In addition to supporting the first time buyer market, we have introduced a number of products that support customers in paying other fees such as stamp duty and general moving costs.

3. How many product rates have you cut since the announcement of Funding for Lending scheme (FLS)?

Lloyds Banking Group (LBG) were among the first to take advantage, drawing down an initial £1 billion, passing the benefits on to customers through more affordable mortgages and loans to Small and Medium Enterprises. With the support of FLS, LBG has committed to lending £500m of funding at even more competitive rates. In the first six months of this year the Group helped over 25,000 people take their first steps onto the property ladder, and our pledge will help over 50,000 people buy their first home during 2012.

As such, we have not increased rates or fees but have reduced over 935 mortgage products across all brands in Lloyds Banking Group since the launch of the Funding for Lending scheme.

In addition, we have recently launched a new 7 year, fixed rate mortgage at 5.89% with no product fee for first time buyers with £500 cashback. This product is also available up to 95% LTV for Halifax NewBuy customers.