Avoid costly mortgage fees

Finding out what all your extra mortgage charges are used to be like looking for a needle in a haystack. Now, however, every lender or adviser gives you a document called a Key Facts Illustration (KFI), allowing you to compare each mortgage against another.

The role of advice

To help get a good view of all the mortgages out there, many buyers use a broker, says Ray Boulger, senior technical manager with mortgage adviser Charcol. But he warns: “The more KFIs people have, the less likely they are to read them.” Although fees are explained in print, exit fees can always rise by the time you come to move your mortgage. In fact, several borrowers have complained about this to the ombudsman in recent months.

Be careful

So what should you look out for? Extended early repayment charges that tie you in after the deal period is over can be expensive, warns Boulger – and while some lenders offer attractive rates, they are often balanced by higher charges elsewhere.

“ Many of the mortgages with high fees fall into categories of semi-commercial such as buy-to-let, or are sub-prime, for people with previous credit problems,” adds Paul Williams, spokesman at IFA, Towry Law. “Those mainstream products with high fees usually have a great headline interest rate to entice the clients in.”

You don’t need credit problems to find nasty charges ahead, though. “Since interest rates stabilised, fees seem to be creeping up,” says Rachel McKay, Moneyfacts spokesperson. “Many lenders also charge you to close your mortgage loan as well as set it up, so fees can make a considerable addition to your costs.”

Is ‘moving on’ always ‘ moving up’?

Moving house is an expensive business once you’ve taken stamp duty, searches, legal fees and sellers’ costs into account. Many borrowers see these charges as inevitable, but are they? “A considerable number of mortgage applications are supplied via the internet these days,” says McKay, “and as arrangement fees were historically administration costs, what exactly is the customer paying for?”

Fees and deals vary widely, says McKay. So a whopping £1,499 arrangement fee with Birmingham Midshires Solutions might put the ordinary borrower off. But for those at the top end of the scale – say, a £1 million Docklands flat – that fee is worth it for a rate of 3.75 per cent.

Fee versus rate

Some borrowers pay high fees for decent interest rates, but they could pay slightly higher rates and choose a fee-free deal. Look, for example, at Yorkshire Bank at 4.59 per cent, with no fee and free valuation; or Chelsea BS, Portman BS and Yorkshire BS, all with no fee and with rates of 4.65, 4.79 and 4.94 per cent, respectively.

You can get lower interest rates, says McKay, but are they worth incurring higher fees – especially if you plan to move your mortgage within a couple of years?

Abbey offers 4.24 per cent but charges £699, but compare that to Nationwide, charging 4.54 per cent and £399. And lenders’ own fees vary depending on the rate you choose, says McKay. “Fees range from a specified amount to a percentage of your mortgage advance and can also be linked to the interest rate,” she explains. So Norwich & Peterborough charge £699 for a 4.54 per cent deal, but £385 for a 4.69 per cent deal. Abbey too charges £699 for 4.39 per cent, but £399 for 4.59 per cent.

Special deals can be costly, warns McKay. “People add fees on to their mortgage but then will be paying interest over the lifetime of the mortgage,” she points out. Yet putting fees on your credit card can mean paying an APR of 19 per cent instead: “You need to take proper advice and work out the sums,” she advises.

However, borrowers can tailor the deal to suit their lifestyle. Williams says: “Some people prefer to add the application fee to their loan and simply pay interest on it, which is a bit of a folly but is always an option.” Also, watch out for deals that charge extra if you don’t take the lender’s insurance, or with compulsory insurance.

Armed with your KFI, you can work out the sums yourself by adding up monthly payments for your initial deal, plus all fees. Then you can choose between low monthly payments with high fees, or higher payments and lower fees – or even get a broker to do the sums for you and to make sure you avoid hidden nasties.