Annoyed at mortgage arrangement fees, is it a rip off?

MarkyMarkD

regularsaver1 wrote:

do you mean 1.99% rather than 4.99%?

Yes, thanks regularsaver1, original post now edited.

MarkyMarkD

Rick62 wrote:

Helpful, I agree, some of these % fees are too high and usually do not offer good value. Particularly in the (unregulated) BTL market they are very common and I suspect are often missold by poor advisers who just add them to the loan (thus spreading the cost over, say, 25 years) but then only compare monthly payments.

Anyone, anywhere (adviser or customer) who compares products on monthly payments is daft. For an adviser to do so is severely negligent, never mind daft.

As I'm sure all the advisers on here would agree, the ONLY way that any adviser should compare products is based on the total cost over the customer's desired period to hold the product - i.e. (in most cases, but not all cases) the incentive/tie-in period.

But just because some advisers are negligent isn't a reason for products not to be allowed to have fees, of any type. Whether they are small or large, fixed amount or percentage, is irrelevant.

Percentage based fees are actually far EASIER to work out the impact of - a 3.5% fee on a 2 year product is OBVIOUSLY equivalent to 1.75% on the rate irrespective of the amount borrowed.

The whole debate about fees being supposedly used to mislead the public all boils down to best buy tables and the fact that they are fundamentally flawed when they compare on rate and ignore fees. If best buy tables compared all products on a total cost basis over the incentive term, using a standard loan amount, most of this debate would be resolved.

Mr_helpful

I am at a loss to the ignorance shown in the last few posts. The example Mark gives only uses a 1% fee which is a bit small in todays market when some are charging 3.5% but i will work with it. Though I dont think he was using live examples of actual rates
By his own admission the mortgage with fee added at the end of the 2 yrs is 1000 higher so one is then either paying svr on 101000 instead of 100K or one is remortgaging a larger mortgage which if you take the same deals again you have 102k against 100K. Rick was right about monthly payments because that is so often what the deal is sold to the customer on.
If you were to project forward using the 3.5% fees being added every 2 yrs then your mortgage after 25 yrs would probably have grown by about 50% on an interest only.
As to the waffle about the effect of longer term. We get a budget from the client and if this allows a shorter term it would be recommended.
How about using live rate Northern rock have the following 2 deals amongst others
both fixed to 01/09/2008
4.49% with 3% fee or 3000 on a 100K loan
5.29% with a £995 fee
So if you were advising a FTB with a 100K mortgage which is most economic

MarkyMarkD

No, Mr Helpful. You still miss my point.

If the customer CHOOSES the product with the lower rate, but the £1,000 fee, and CHOOSES to add it to the loan, the total cost over the two years is merely £10 more.

If they then CHOOSE to remortgage £101k instead of £100k, deferring the repayment of the £1,000 again, then obviously they'll pay interest on the £1,000. But that's because they have CHOSEN to borrow the additional £1,000 and have (presumably) spent that £1,000 on something else.

It's all about personal choice.

But to claim that somehow it's a rip-off to charge the £1,000 fee in the first place, or that the "true cost" of the £1,000 fee is £3,000 or whatever because of the impact of interest over 25 years, is cobblers. The "true cost" of the £1,000 fee on the initial two year mortgage is £1,010. Big wow.

And 1% isn't an atypical fee - indeed it's more than most NORMAL products have on them. It's only the recent exceptional cases which have fees of 2%, 3% or 3.5%.

Regarding your NR examples, with their rather poor 1.5 year fixed term, the fees work out at 2% pa on the 4.49% rate i.e. 6.49% effective, or 0.995% / 1.5 = 0.662% on the 5.29% rate i.e. 5.952% effective.

I don't think you need me to tell you which to advise to your FTB. The 3% fee product is obviously only worthwhile for customers borrowing over £k.

To use algebra (just for fun, honest!):

6.49% = 5.29% + £995/1.5/x where x = break-even loan amount.

So, x = £663 / (6.49% - 5.29%) = £55,278.

If you are comparing a product with a fixed fee with a product with a variable fee, then the fixed fee one will be better value for those with larger mortgages. So here, if anyone is borrowing under £55,278 or so, they should go for the lower rate and variable fee; if anyone is borrowing over £55,278 they should go for the higher rate and fixed fee.

In normal circumstances where comparing two fixed fees, but different rates (and this applies where one of the fixed fees is nil too) then it will be people borrowing OVER the break-even point who should take the higher fee product.

As regards advising on the basis of budget, this really is WRONG, WRONG, WRONG. Total cost is all that really matters. If people have to choose products with higher total cost because of budget issues, they are either putting off the inevitable or shouldn't be buying in the first place IMHO.

The exception to that rather general statement is where people genuinely expect significant increases in income in the future, in which case higher total cost on a stepped product may genuinely be the best for them.