John Myers, Head of Mortgages
As the phrase goes, don't judge a book by its cover - or in this case, don't judge a mortgage product by its headline rate.
HSBC continues to be one of the few lenders actively trying seeking to pull in new mortgage business. It has launched a 'market-leading' two-year discount with a rate of 4.99%. In the present climate such an attractive rate is welcome news, but appearances can be deceptive.
In reality, the HSBC deal isn't quite the market leader it appears to be because it carries a whopping £2,499 arrangement fee. High arrangement fees, such as this, can be worth paying but it depends on the size of the mortgage. The new HSBC deal is only best value for those borrowing more than £212,000. However, the maximum loan size on this product is £250,000 so there is only a small window for which it is the market-leading deal.
Given that the average house value is £172,415 according to Nationwide building society, HSBC's 4.99% deal will not be the best mortgage for the majority of borrowers as most people borrow less than £212,000. It is a good example of why you need to look beyond the headline rate when comparing mortgages.
HSBC has an alternative product - a two-year discount at 5.49% with a £999 fee - which actually works out cheaper over the two-year period for anyone borrowing less than £212,000. Someone wanting to borrow £100,000 on a 25-year repayment basis would save £792.48 over the two-year discounted term if they opted for the deal with the higher rate and lower fee.
With lenders levying an increasing array of different mortgage fees, once you have decided which type of mortgage to go for, it is vital to compare the total cost of the loan, including fees, in order to identify which mortgage offers the best value for your circumstances. Watch our videoblog: 'Mortgage market update'.
We give a run down of the fees you may be charged:
Arrangement fees
Arrangement fees are charged when you take a mortgage out. You usually pay at the point of completion but some lenders split the arrangement fee into two parts, so you pay a booking fee when you first apply - this effectively reserves that product for you - and the main arrangement fee when the funds are released
These fees have soared in recent years, from around £350 four years ago to an average of nearly £1,000 now. And in some instances, as the HSBC deal mentioned above highlights, arrangement fees can be even higher: Intelligent Finance for example, has a deal with a £5,000 fee for loans between £500,000 and £1million.
As well as flat fees, a number of lenders have introduced percentage-based arrangement fees. This is where you pay a proportion of the loan size, for example, 1.5%. This equates to an arrangement fee of £750 for someone borrowing £50,000 or £7,500 for someone borrowing £500,000. Consequently, percentage fees tend only to offer good value for those with small mortgages. If you are borrowing a large amount, you will probably be better off paying a flat rate fee.
Many lenders will allow you to add the arrangement fee to the mortgage, which helps minimise initial costs. However, bear in mind that you will be charged interest on this amount for the entire mortgage term so if you can afford to, it is better to pay the fee upfront.
Always ask a lender at the outset about the terms that apply to the fee - for example, will it be refunded if your application does not continue?
Administration fees
Halifax, the country's largest lender, has introduced a 'mortgage account fee' (MAF) of £245, which is payable when the mortgage funds are released although the charge can be added to the loan without incurring interest. The new fee has been introduced as a replacement for the Mortgage Administration Exit Fee (MAEF), after the Financial Services Authority (FSA) clamped down on lenders over exit fee charges last year. Halifax stopped charging an exit fee about 12 months ago, but the introduction of the new fee is higher than the £175 it used to levy when a borrow closed their mortgage account.
The bank argues that the new charge is not just an exit fee with another name, but that it replaces other fees and costs including the deeds dispatch fee, certificate of loan interest fee and duplicate statements. It is also not the only lender to levy a MAF. Abbey charges £225.
The MAF is payable at the time a mortgage is taken out, in addition to any arrangement fee.
Exit fees
The FSA clamped down on exit fees last year after many lenders had increased them and were charging borrowers a higher fee when they redeemed their mortgage than the one that applied at the time the loan was taken out. The regulator said this was unfair and that lenders had to fix the fee so that it could not increase during the term of the mortgage; be able to justify any increases if the fee did rise over the term; or scrap the charge altogether.
A number of lenders, including Halifax and Abbey chose to scrap the charge. Some such as HSBC have never levied an exit fee. However, others still charge them. These include major lenders such as Alliance & Leicester, which charges £295 and Woolwich which has an exit fee of £275.
Other fees
There are a host of other fees to keep your eyes open for. These include:
- Completion fee - A charge that covers the cost of transferring the funds to the borrower.
- Early repayment charges (Erc) - This is a fee that is levied if you redeem your mortgage early. With most mortgage deals, an Erc is only charged if you redeem within a fixed or discounted period. However, a number of products carry an extended Erc which means you are tied to the lender's standard variable rate for a number years after the introductory period has ended. Some loans are Erc free - lifetime trackers for example, tend not to have Ercs - so if you want total flexibility look for this type of product.
- Legal costs - You will need to employ a solicitor or licensed conveyancer even if you are only remortgaging. The amount you pay will depend on the complexity of the work - if you are purchasing a property legal fees are higher than if you are remortgaging - but fees vary depending on the solicitor so it is worth getting a few quotes before deciding which firm to go with. Some mortgage products offer free legal work to those remortgaging.
- Survey/valuation fees - Mortgage lenders require a valuation of the property before they make an offer, to protect their 'investment'. The valuation fee is normally paid upfront by the borrower and the amount you pay will depend on what type of survey you opt for - a basic valuation report, homebuyer's report or full structural survey. Many remortgage deals include a free or refunded valuation as only the basic survey is required in this instance.
If you are buying a property it is advisable to opt for a homebuyer's report or structural survey unless it is a new build as a basic survey will not identify any possible structural problems.
Before applying for any mortgage deal ensure you take a thorough overview of all the charges associated with the offer. If you need more help, call one of our advisers on 0845 345 5705.
Have your say: Are you coming to the end of a fixed rate deal and are you worried about what may be on offer in the coming months? Have you been tempted by a headline rate only to discover that the product wasn't as good as you first thought? Find out what our community members are saying and share your thoughts, opinions and experiences in our forum.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.
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