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How a home loan can now cost you £10,000 

The fees being charged on mortgages and remortgages are rising at an unprecedented rate, with the average arrangement charge almost doubling in the past two years.

More lenders are charging uncapped arrangement fees for mortgages which means that borrowers could pay up to £11,000 for a top mortgage deal.

While flat arrangement fees are typically around £800, a growing number of deals charge a percentage of the loan so bigger borrowers are the hardest hit.

With the average cost of a detached house at £340,000, a mortgage could cost around £9,750 to arrange assuming you borrowed £300,000. On a £150,000 mortgage, the arrangement fee would be £4,875.

In November last year, only 110 different mortgage products came with an uncapped application fee. However, in the past 12 months, that figure has grown to 506.

The rate at which banks and building societies are increasing the cost of their fees or switching to uncapped fees is alarming. Borrowers need to look carefully at mortgages and remortgages and not just focus on the interest rate. What might seem like a good deal will soon become a bad deal once fees are taken into account.

The cost of capped, or flat, arrangement fees has also risen by around 63 per cent in the same period, from £509 to a typical £834.

The highest percentage fee is around 3.5 per cent on mortgages, this equates to £17,500 for a £500,000 loan. Even on a more typical £150,000 mortgage, the fee equates to £5,250.

Nine per cent of all "prime" mortgage deals now involve a percentage fee. Two years ago they were virtually unheard of, at least in the residential market, although they have been common in the buy-to-let market for some time.

The problem with percentage fees comes down to the fact that the impact of the fee doesn’t diminish no matter how large the mortgage size. A flat fee can be worth paying on a larger mortgage if it gets you a good rate as the saving in interest outweighs the cost of the fee.

The smaller the mortgage or remortgage the more important it is to assess the impact of set-up fees. For those with a loan of less than £100,000 say, it is likely to be worth seeking out a product with little or no costs.

The average cost of setting up a mortgage has jumped from £441 in 2005 to an average £827.

Many lenders, including high street banks have now launched 25-year deals, but demand for such products remains low as a recent study revealed that just 2 per cent of borrowers have inquired about 25-year mortgages since July.

Unwary borrowers could find that a seemingly good mortgage deal turns into a bad one when the fees are taken into account.

But the rise in fees over the past two years looks increasingly like profiteering by the banks. There is little evidence that mortgage deals are any more competitive than they were two years ago - many commentators say they are actually less competitive - yet arrangement fees have more than doubled and many other associated costs, such as legal and valuation charges, survey costs and exit fees, have also risen sharply. As a result, homeowners may want to rethink whether it makes financial sense to constantly remortgage every two years.

The author is Melinda Varley who an experienced journalist currently specializing in articles for the financial field. Melinda has held several positions for magazines and newspapers both hard copy and online and both in the UK and Australia which is where she originates from.

This article was written on the 20th December 2007.

This article does not represent ‘financial advice’ as each persons individual requirements will be unique to their needs. If there is something in the article which you which to rely on then please check those details with any person from whom you purchase a term life policy at the time of purchase.

The views in this article represent those of the author and not those of Netbasic Limited.