Since the global credit crunch swept across the UK last year the cost of borrowing has rocketed in all areas of the financial sector, particularly mortgages. We have seen the interest rates on mortgage rocket, and this is despite three recent base rate cuts from the Bank of England between December 2007 and April 2008. However, whilst the base rate has been cut lenders have continued to hike up mortgage related costs, which means that many borrowers have not benefited from the base rate cuts.
One of the major costs associated with mortgages is the arrangement fee that is charged, and over recent months lenders have hiked up these arrangement fees, which in some cases are double the amount that they were last year. Since last summer some mortgage arrangement fees have gone up by around 96%, and all of this adds to the financial burden faced by borrowers at an already financially turbulent time.
Whilst mortgage arrangement fees can now be costly, borrowers are urged to remember that they do vary from one provider to another, and therefore it can really pay to compare different fees in order to find the best deal. However, it is also important to look at other aspects of the mortgage, such as the rate of interest charged and the repayment periods offered.
However, one major downside of these arrangement fees is that many people cannot afford to pay them upfront, and this means that they often have to add them to the mortgage loan. The borrower will then be charged interest on the arrangement fee, and for those that tend to remortgage on a regular basis, and therefore have to keep adding the arrangement fees to their mortgage, the interest charges can be phenomenal.
One industry official said: 'This is a real catch-22 for consumers who are struggling to find the funds to pay mortgage set-up costs. By allowing consumers to add fees onto the mortgage, it could be argued that providers are doing them a good turn. This is particularly true for first time buyers where it could mean the difference between getting on the property ladder or not.'
She also said: 'However, adding fees to a mortgage means that you will be spreading the amount over many years and paying interest for the pleasure of doing so - this is an extremely expensive option and should always be seen as a last resort. If you can in any way manage to pay the fee upfront this will always be your best option. Otherwise buyers should make sure that they make regular overpayments to minimize the impact of high interest costs - as they could end up doubling the original cost of an arrangement fee.'