Following on from our recent article about the hidden costs of buy to let mortgages, we look today at the ways in which banks and building societies are using hidden charges on some of their normal residential mortgages.
As the mortgage market has become more competitive and lenders struggle to offer low “headline” mortgage interest rates to win business, they are turning to other forms of charging to make profits.
If you have been trying to arrange a fixed rate or tracker mortgage recently, you will have noticed that many banks and building societies have increased their arrangement fees.
Take the Halifax, for example. They are currently offering a two year fixed rate deal of 6.59pc, which sounds attractive until you realise that there is a £499 arrangement fee for that product.
The arrangement fee is reduced to £299 if you take out a three year fixed rate mortgage with the Halifax, however the arrangement fee is boosted to £349 if you borrow between £75,000 and £500,000, which most people do.
Two year fixed rate terms might seem attractive if you think that interest rates are peaking and will start to decrease in 2009, however the arrangement fees add around £250 per year (£20 per month) to your mortgage costs over a two year period.
Extended tie in periods
An extended tie in period is the time after the fixed rate term during which the lender can still charge you an early repayment fee.
For example, you may have a two year fixed rate mortgage and expect to pay repayment charges during that time, however an extended tie in means that repayment charges could be due for another two or three years.
Take the Abbey, for example. They are currently offering a two year fixed mortgage at 5.34pc. Considering that the base rate is currently 5.75pc, this looks like a fantastic deal.
There are a number of catches for the borrower though. The most important is the extended tie in period. Although the fixed rate terms end on 9th September 2009, you are still liable for early repayment charges until 2nd March 2011.
Another point to watch out for on the Abbey web site is that they quote repayment charges in days and not years.
A repayment charge of 520 days interest may not sound too bad until you realise that 520 days is almost 1.5 years of interest payments due if you terminate your mortgage early.
The high costs of early repayment charges can easily wipe out any savings made by low mortgage interest rates.
You might have also noticed that valuation fees have increased recently. Usually dependent on the price of property, you can expect to pay around £400 for a £300,000 house to be valued.
Barclays, for example, charge £385 to value a £300,000 house and £685 for valuation of a £700,000 property.
Valuation charges generally consist of two elements – the surveyors fee and an administration fee. Banks and building societies are making more and more profit form these charges as often the surveyor conducts a “drive by” valuation.
Drive by valuations provide the surveyor with a brief opportunity to compare the outside of your property with house values within the local area and to verify that the house actually exists.
Other data such as from detailed web sites such as HomeTrak can be used to value property without even visiting it. these techniques are driving down surveying costs, whilst boosting the profits of the lenders.
Consider more than the mortgage interest rates
As we have shown, anyone looking to arrange a mortgage should take care to look beyond some very attractive looking mortgage rates. Lenders need to make profits and are finding ways to win your business with low mortgage rates and keep their shareholders happy with high arrangement fees and other costs.