Mortgage lending is a cut-throat market, forcing lenders to become more cunning. Have you been caught out by one of these sly tricks?
As the housing market comes off the boil, sneaky mortgage lenders are frantically looking for ways to keep the gravy train going.
One way to lure in over-stretched buyers (especially first-timers) is to offer ultra-low interest rates. For example, you can fix your mortgage for five years at an annual rate as low as 4.39%, which looks pretty attractive at first glance!
However, with the Bank of England's base rate currently just 4.5% a year, a lender won't make much money from this deal. Hence, mortgage lenders have come up with ways to boost their profits by raising fees and other charges. Here are three tricks to watch out for!
1. Soaring arrangement fees
The majority of homebuyers or remortgagers (especially those who are over-stretched) probably don't look beyond the attractive headline rates on offer. However, they should, because the devil's in the detail, especially in the Best Buy tables!
Essentially, mortgage lenders are giving with one hand and taking away with the other. Those Best Buy headline rates are offset by rapidly rising arrangement fees, especially for remortgages. Indeed, taking additional fees and costs into consideration, it's unusual for the lowest headline rate to be the cheapest home loan.
For example, Moneyfacts lists six Best Buy fixed-rate mortgages without extended redemption penalties. The lowest arrangement fee is £349, three loans charge £395 and two charge £499, giving an average fee of £422. Think of it this way: £499 is equivalent to an extra 0.25% a year on a £100,000 loan with a two-year deal. Ouch!
Smart borrowers do their sums by looking at all the costs of a home loan before diving in. You can learn how to do this in HowTo Choose A Mortgage and How To Measure Up Mortgages.
2. Exit fees have more than doubled in twelve months
Exit fees when you pay off your mortgage or move to a new lender are following the same path as upfront arrangement fees: they've gone through the roof over the past year. The good news is that UK financial watchdog the Financial Services Authority (FSA) has warned mortgage lenders that it views this practice as unfair.
Forcing up administration fees without reasonable justification falls foul of the Unfair Terms in Consumer Contracts Regulations, and the FSA can force lenders to lower or remove their fees. For example, in May, Abbey's exit fee shot up to £225 from £99. Nothing substantial has changed to make redeeming a mortgage any more expensive, so why the huge hike? If lenders want to deter borrowers from moving, they need to come up with attractive deals, not rely on unreasonable exit charges to lock in borrowers!
For the record, I'm about to complain about the fee I was charged when I paid off my home loan earlier this year. My original mortgage contract specified a fee of £50, but I was charged several times this amount.
3. Rip-off insurance premiums
First things first: you'd have to be crazy to buy insurance from your mortgage lender, because it sees you as a captive audience, just waiting to be fleeced! Hence, protection policies from mortgage lenders can be three times as expensive as the Best Buys, which I call the Rule of Three. Learn more about this sting in An Easy Way To Pay Off Your Mortgage.
What's more, the fun doesn't stop with sky-high premiums. That's because many mortgage lenders will add your annual premium to your mortgage debt and charge interest on it while you pay it back monthly. In other words, it lends you the insurance premium and you pay for the privilege. So, that annual premium of, say, £600 for household buildings and contents insurance could cost an extra £20 a year or so in interest. Sneaky, huh?
Finally, if you want to dodge the traps and find a happier home loan, read Cheaper Loans Mean Happier Homes!
Many thanks to Fool reader Rob H for inspiring this article!
More: Find a delightful deal in our Mortgage centre! | Lower your premiums in our Insurance centre.
