Punitive measures handed out to banks and building societies to put a stop to over-inflated fees and charges may give the impression that the tide is turning in consumers’ favour, but profit-driven lenders will have to find other ways to recoup revenues – and that can only come from customers’ pockets.
According to Richard Brown of Moneynet.co.uk, the recent announcement by the Financial Services Authority (FSA) that lenders must reform their settlement fee structures, could well lead to a big hike in arrangement fees.
“Much has been made of lenders having to reduce their exit fees – now they will be looking at other ways to make up the shortfall,” he said.
“As this lucrative revenue stream dries up to a trickle and sizeable sums are handed out in refunds to former customers, I believe that we will see an increase in arrangement fees being charged at the outset and that more lenders will adopt dual pricing policies.
“Mortgage lenders are masters at making their mortgage products difficult to understand and as confusing as possible,” he said.
“An increasingly popular trend is for lenders to offer different rates depending on how much arrangement fee the borrower is prepared to pay up-front,” said Brown. “In other words, the more you pay as an up-front fee, the better the rate they will offer you.”
A three tier rate offering from Alliance & Leicester, all of which are fixed until March 2009, presents borrowers with a choice of pay now or pay later – 5.04 per cent with an arrangement fee of £1,499, 5.24 per cent with a fee of £999 or 5.34 per cent with £599.
On a mortgage of £100,000 for example, the repayments would be £587 on the lowest rate or £605 at the higher rate, with the latter incurring an additional £18 per month over the first two years. This adds up to a total extra cost of £432 but at the same time brings a saving of £900 from the lower arrangement fee. The only way to decide which is best is to do the sums.
Broadly speaking, the larger the mortgage, the more likely borrowers are to benefit from paying the higher fee and taking the lowest rate.
A current offering from the Portman Building Society is an example of how lenders are now securing their profits upfront. A year ago it was offering a two-year fixed rate at 4.35 per cent with a maximum arrangement fee of 0.60 per cent of the mortgage. A similar product today is offered at an interest rate of 4.84 per cent fixed for two years, but the arrangement fee is now 1.5 per cent of the mortgage amount. On a loan of £150,000 this is a £1,350 extra.
To add further to the confusion there are even some lenders that have different options for a low rate with extended tie-ins, an even lower rate with extended tie-ins and tied insurance or a higher rate without conditions. Working out which is the best in the long run is no mean feat.
“Consumers need to be aware if you are being offered an unusually competitive rate then there is probably a catch and you need to check all the terms and conditions of the product,” said Brown.
“Lenders are required to issue a Key Features Document before you sign up which will detail all the terms and conditions of the product they are selling you. If you don’t read it before signing, you could well be in for a nasty shock. If in doubt, consult an Independent Financial Adviser or mortgage broker who will be able to do the sums for you and make the recommendations.”
