Fears about an increase to the base rate have led to a flurry of fixed rate mortgage deals hitting the market, but new research from uSwitch.com, reveals that consumers are facing a double whammy on mortgage set-up fees.
Not only are they being asked to fork out £1,044 on average just to set their mortgage up, but if they then add this to their mortgage the amount could increase to £1,701. With 11.4 million mortgages in the UK at the moment, the mortgage industry is raking in an additional £2.6 billion on set up fees alone.
Homeowners keen to fix ahead of a rise in the base rate are penalised twice. While the average mortgage arrangement fee is £1,044, the fee for a fixed rate mortgage is £1,054. This compares to £1,017 for a tracker mortgage. If the average arrangement fee of £1,054 for a fixed rate mortgage is added to the mortgage it increases by £720, or 70 per cent, to £1,791. But things could be even worse, with the maximum fee for arranging a mortgage currently £1,875. Over 25 years, interest of £1,185 will inflate this fee to a staggering £3,060.
The average deposit is now £34,000 and finding the money for fees at an already expensive time is even harder for young Brits. Nearly half (49 per cent) of 18-34 year old homeowners added the fees to their mortgage compared to just a fifth (22 per cent) of over 55s.
If borrowers don’t have savings to dip into to cover the fees, one pain free way of paying them is to use a credit card offering 0 per cent on new purchases. By putting the average fixed rate mortgage fee of £1,054 on a standard 13 month purchase card, people could save on interest and would have to set aside just £81 a month to clear it. If the same fee was added to the mortgage, it would have already cost £26.36 in interest over the same 13 month period. The important thing here though is that the borrower clears the debt within the 0 per cent period, otherwise they will be hit with a hefty interest rate.
Michael Ossei, lending expert at uSwitch.com, says: “With a potential base rate rise looming, more people are being tempted to fix their mortgage. But with higher arrangement fees, this is a real catch-22 for consumers who are struggling to find the funds to pay mortgage set-up costs and who fall into the trap of adding them to their mortgage. It may be convenient, but it comes at a hefty cost. For first time buyers especially, these fees could be what stops them getting on the ladder. But adding fees to a mortgage will see the cost snowball.
“Adding arrangement fees to a mortgage should always be seen as a last resort. But if you cannot afford to pay them upfront, putting the fees on a credit card offering 0 per cent on purchases can help spread the cost painlessly. Consumers just need to make sure they can pay the amount off in full at the end of the introductory period.
“Regardless of how and when people choose to pay these fees, they must do their sums carefully. They should also ask for figures to show the overall impact on the amount of interest paid. By doing your homework into what mortgages are available, and what options there are for putting your fees on credit, you can make sure you don’t get stung.”
