Record low fixed rate mortgage deals are being propped up by larger arrangement fees, as the average figure has breached £1,000 for the first time in
Record low fixed rate mortgage deals are being propped up by larger arrangement fees, as the average figure has breached £1,000 for the first time in four years.
Mortgage borrowers have enjoyed a rate war recently, particularly in the fixed rate market. But despite the headline grabbing rates, the fees on fixed rate mortgages are on the rise, reaching their highest point since August 2013.
At that point, the average fixed mortgage fee stood at £1,005 before falling to £886 in July 2014. It rose to £929 in July 2015 and to £986 this time last year. And today, the average fee charge is £1,018 according to data by Moneyfacts.
Charlotte Nelson, finance expert at Moneyfacts, said: “With borrowers being told to switch to a low fixed rate mortgage for some time now, the increase in the average fee to over £1,000 and the highest point in four years is disappointing news. So, while rates remain at record lows, these are being compensated in part by larger arrangement fees.
“Some of the lowest deals on the market have fees of around £2,000, and some borrowers are being asked for even more, with the largest fee on a fixed rate mortgage sitting just shy of £4,000 (on a deal for professionals only). As fees vary wildly even within just one provider’s mortgage range, it leaves many borrowers questioning what they are for and what they would gain from paying extra in fees.”
Nelson explains that deals with larger fees often allow you to add the fee to the mortgage advance. This increases the amount borrowed, pushing up monthly repayments. She said this seems “wasteful” when there are fee-free products out there.
“That said, a low rate with a high fee does tend to favour those borrowers purchasing properties at the higher end of the housing market, so the advantages of a fee-paying versus a fee-free product will depend on personal circumstances.
“These larger fees mean that the new lower rate mortgage deals on the market might not be as cost-effective as their headline-grabbing rates might suggest,” she said.
A borrower opting for the lowest two-year fixed rate mortgage at 60% loan-to-value with no fee (£150k mortgage over 25 years, currently Skipton Building Society’s 1.48% deal) will see them £1,088.61 better off in the first year compared with the lowest overall rate, which comes with an above average fee of £1,495. As such, the extra saved by opting for a deal with no fee could be better used to overpay the mortgage, which could help borrowers become mortgage-free quicker, Nelson said.
“Those savvy borrowers heeding the advice to remortgage could find that moving deals can be a costly affair, especially if their preference is for shorter-term fixed rates. Therefore, with fees on the rise, it is more important than ever for borrowers to consider the true cost of a mortgage before obtaining a deal,” she added.