OMG! £2600 arrangement fee!!!!!

jamesd

Mr_helpful wrote:

1st scheme with 3.5% fee 23 payments of 688.59 followed by 59 payments at svr 7.34% of £1266.73 followed by 218 payments at variable rate currently 7.09% of £1223.59 (reason for this discount is NR give a loyalty discount)

= 357317.26 over 25 years, possibly plus the fee

over 2 years = 23 * 688.59 + 1266.73 + 7000 = 24104.30

Mr_helpful wrote:

2nd Scheme with 2% fee 23 payments of £814.68 followed by 59 payments at svr 7.34% of £1248.38 followed by 218 payments at variable rate currently 7.09% of£1205.86

= 355269.54 over 25 years, possibly plus the fee

over 2 years = 23 * 814.68 + 1248.38 + 4000 = 23986.02

The first scheme is more expensive for both 2 years and 25 years, according to the numbers in the KFI information. Now back to the original post you made that I asked about:

Mr_helpful wrote:

1st scenario 3.5% fee £7000 rate 3.99% £688.59 per month for 2 yrs
2nd scenario 2.0% fee £4000 rate 4.79% 814.68% per month for 2 yrs
So which is best both show APR of 7.3% so no hint there
24 X 688.59 = 16526.16 + 7000 = 23526.16
24 X 814.68 = 19552.32 + 4000 = 23552.32 The first deal being better off over the 2 yrs by just £26.16 not much really is it until you look at the effect of the fees on overall payment. Taken fro a KFI the total cost over 25 yrs would be for the 1st scenario 565316.54 and only 560259.87
The effect of those fees in the first scenario is over 5000 extra to pay back on a deal that looked slightly cheaper.

MarkyMarkD

Mr_helpful wrote:

The hidden effect of fees using current figures from a KFI
1 mortgage interest only 200K using Northern rocks current deals for 2 yr fix
1st scenario 3.5% fee £7000 rate 3.99% £688.59 per month for 2 yrs
2nd scenario 2.0% fee £4000 rate 4.79% 814.68% per month for 2 yrs
So which is best both show APR of 7.3% so no hint there
24 X 688.59 = 16526.16 + 7000 = 23526.16
24 X 814.68 = 19552.32 + 4000 = 23552.32 The first deal being better off over the 2 yrs by just £26.16 not much really is it until you look at the effect of the fees on overall payment. Taken fro a KFI the total cost over 25 yrs would be for the 1st scenario 565316.54 and only 560259.87
The effect of those fees in the first scenario is over 5000 extra to pay back on a deal that looked slightly cheaper.

I won't stop pointing out that you are wrong on this issue, Mr Helpful, until you understand it for yourself.

Your example is very useful as a means of doing this.

The total cost, including the cost of paying off the fees at the end of the two years is virtually the same under the two scenarios. In other words, NR have priced these two products identically fairly.

But the payments for the other 23 years of the agreement, that you've used to "prove" your point, are based on the capital balances of £207k and £204k respectively, in other words WITHOUT paying off the fees at the end of the two years.

So, you are comparing:

(1) someone who has borrowed £200k, and made £16,500 in interest payments; with
(2) someone who has borrowed £200k, and made £19,500 in interest payments

over the next 23 years of their mortgage's life.

It's scarcely surprising that the total cost over 25 years is higher in the first case - the customer has repaid £3,000 less in the first two years and has the benefit of that £3,000 over 25 years.

Many borrowers are very happy to pay £3,000 less in the first two years in their new home. And they don't care that it costs them more over the remaining period to do so. They are choosing to borrow £3,000 extra, in effect, and to repay it over 25 years.

Others are happy to pay £3,000 less in the first two years, but then pay that £3,000 off when they remortgage leaving them with exactly their original £200k outstanding. And they are £26.16 better off this way, according to your figures.

Nowhere in this analysis is there anything indicating that charging higher fees is wrong. Nowhere in this analysis is there anything which would lead anyone to choose the "wrong" mortgage on the basis of comparing these two products properly. Indeed, these products are both equally fairly priced so there is no "right" or "wrong".

The only reason anyone would choose the "wrong" product (in another situation, where there was one that was "right" and one that was "wrong") is if their adviser was a muppet, and advised on the basis of repayments per month rather than total cost over the two years.

And if the borrower WANTS i.e. CHOOSES to borrow £200k now, then £207k in two years' time, and so on, that's their own personal choice. They could do that whether or not the initial product had a £7k fee.

Now, low start mortgages have been mentioned in the context of high fee mortgages. It's fair to point out that high fee products are incredibly similar, in effect, to low start mortgages. The major difference, however, is that low start mortgages tended to have long extended tie-in periods whilst this sort of high fee product does not.

Mr_helpful

Oh jesus and just how many people pay off the fees over the 2 yrs. Fact virtually no one. just the same as they dont pay the advisers fees over the benefit period. One has to live in the real world. So if my figures were not correct I suggest you get the FSA to alter the structure of a KFI

MarkyMarkD

There's no need for bad language.

So, just because people have the choice of carrying forward fees from one mortgage to another, we should ban all fees? Or ban high fees? Or ban adding fees onto loans?

None of those make any sense. Nor does (what I presume is) your basic premise that we should assume that everyone adds all fees onto their loan, and disclose the cost of the fees with compound interest over 25 years.

Your figures are not incorrect. It's the conclusions you draw from them which are incorrect.

I would personal advocate the KFI showing the total cost over the minimum tie-in period and indeed an APR over that period, and I've posted to that effect before.

Total amount payable, over a 25 year period, is as useful as a chocolate teapot. But it seems to be your preferred measure of mortgage value.

Mr_helpful

Marky Mark
I agree with you regarding the APR on the KFI and that the total cost figure is useless. Nethertheless the vast majority of people will add the fees to the loan and not pay them off over the period of the loan thereby dis advantaging themselves as the effect of the fees is unclear. The FSA operates a double standard here. Adding say 7K of credit card debt to a mortgage is frowned upon because of the extra time taken to pay it off so I cannot see the difference in adding credit card debt or adding the same amount in a fee.
The lenders and brokers say choice but what is really meant is confusion and the FSA sits and lets it happen. For many years the FSA sat and watched as 5yr single premium payment ptotection plans were added to peoples loans. suddenly they woke up to the fact that it was bad and so I believe they will wake up over fees

MarkyMarkD

Your point re single premium payment protection plans is interesting. I have heard a lender arguing that it is better for the borrower that these policies are priced as single premium, because if they are paid on a monthly basis they tend to be the first thing that gets dropped when the borrower gets into financial difficulty.

Whilst I can see the opposing view, which is that they are inflexible etc. if done as single premium, I can actually see the logic in the argument posed above. What do you think about that?

Certainly thinking about people I know in financial difficulty, their life assurance policies always bite the dust first, followed by their household insurance :scared:, then followed finally by the loan repayments and then the mortgage. I'm sure that this isn't a rare situation.

So, those who may end up being forced to choose stand-alone payment protection by an FSA thinking it's doing the right thing, will end up paying the premiums when they don't need the cover, and then stop paying just before they need to claim in lots of circumstances. And we'll have even more complaints than we do now!

dunstonh

The FSA fined a firm in November for selling single premium payment protection and they have to go back to all the people that they sold it to to make them aware of the alternatives and compensate if necessary. They didnt document that regular plans exist and would probably be cheaper.

Mr_helpful

Trouble with single premium is it only last for so long but if its added to the mortgage you pay for the term of the mortgage just as you do with an arrangement fee. Just as with a high arr fee Single premium payment protection is good for the lender as there is no risk to them at least not until the FSA get to them

MarkyMarkD

The lender I am referring to was talking about it in the context of personal loans where the fixed term nature of the cover is fair enough. I can see that it's a bit duff on a mortgage where the borrower might redeem after no time at all.