Mortgage fees: Why are they rising?

Over the last week lenders have been lining up to cut interest rates on their mortgage deals, but a look at the small print shows arrangement fees are rising.

Finding a mortgage is getting tough amid the credit crunch as the number of mortgages on the market dwindles from over 13,000 deals to just 3,748 products in a year.

Lenders are also limiting the size of loans – with high loan-to-value (LTV) deals falling off the menu as they focus on safer remortgage customers with plenty of equity behind them and those able to stand up to the fall housing prices.

However, some light has been on the horizon with falling rates on mortgages.

Data from Moneyfacts.co.uk show the interest rate on the average mortgage has now fallen to levels last seen in August 2007 - before the credit crunch struck.

Royal Bank of Scotland (RBS), Abbey and Britannia among others have cut rates so the average two-year fixed rate deal is now 6.59 per cent – compared with 6.56 per cent in August last year. This figure rose well above seven per cent earlier in the summer.

But this hides the rise in mortgage fees.

The average fee on a two-year fixed rate mortgage deal now stands at £964 – compared with £803 last year.

And some fees are even higher, touching the £2,000 barrier. Furthermore fees cited as a percentage of a loan can be even higher. For example a two per cent fee on a £500,000 mortgage stands at £10,000.

So why are fees rising?

A simple cynical view would be that mortgage lenders are cutting their rates to gain a position in the market, but raising fees to maintain their profit margins.

There is nothing stopping lenders setting fees as high as they wish – as unlike cap they may face on overdraft charges set a penalties – they are free to use fees to build profits.

"We have seen fees rising since before the credit crunch," says David Hollingworth, head of communications at London & Country Mortgages.

"With people switching mortgages and some rates cut to the bone, the fees are just part of the price."

Should I pay the fees?

Looking at mortgage deals, borrowers have a simple choice with fees. Either they can opt for a mortgage with a low interest rate and high fees or a higher interest rate with no or low fees.

Tanya Jackson at Yorkshire Building Society explains mortgages in their range all generally end up with the same overall cost, but the different rates and different fees meet people's different priorities.

"People coming off a fixed-rate deal and seeing interest rates higher may opt to keep monthly repayments low and pay a fee," she says.

"Meanwhile others may want to avoid the fee and be willing to take the higher interest rate."

The use of fees also makes comparing mortgage deals complex and where a mortgage broker can be handy.

"The size of the loan is the main driver over whether to pay fees," explains Mr Hollingworth at L&C.

"On a modest mortgage it makes sense to find a low fee or no fee mortgage."

Another major factor is the length of a deal, as with a longer term mortgage the size of the fee will matter less, when compared to paying a new fee every two years if remortgaging so often.

But Mr Hollingworth warns people to be wary of is adding a fee to the mortgage.

By adding the fee to the mortgage, the size of the fee grows as you are paying interest on it.

So try to avoid being blinded by low rates and put off by soaring fees and find the mortgage deal to suit you – although this could be hard amid the credit crunch.

Daniel Barnes