When low rate mortgages don’t add up
Damian Clarkson    23rd July 2007

Switching to a lower rate mortgage can actually work out far more expensive, thanks largely to a 1000% hike in mortgage arrangement fees.

Lenders have changed their marketing strategy in recent years, offering attractive headline rates to lure homeowners in, and then hitting them with big 'arrangement’ fees in the fine print.

Arrangement fees in 2005 cost as little as £299, but Intelligent Finance has just announced a massive £2,999 levy on its tracker mortgage product.

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Water have been muddied Clearly fees are being used to offset headline-grabbing mortgage offers – so fees will continue to play an ever-larger role in total mortgage costs.

That means homeowners can no longer afford to base their choice on the headline rate alone, but have to factor in all costs involved. This is especially true for people with smaller mortgages. Consider the example in the table below.

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£75,000 loan over 20 years

Lender	Fee	Rate	1-year cost	2-year cost	20years
Halifax	Pay £499	6.89%	£5,667	£10,834	£112,084
Lloyds TSB	Pay £1,999	5.99%	£6,492	£10,984	£112,234
Lender’s SVR	FREE	7.5%	£5,625	£11,250	£112,500

Based on £75,000 interest-only mortgage

At first glance, Lloyds TSB’s two-year fix at 5.99% seems streets ahead of the lousy 6.89% on offer at Halifax. But believe this, and you’ve fallen for their marketing ploy.

Put your remaining £75,000 debt with Lloyds TSB and it will cost you £10,984 at the end of the two-year period, compared to £10,834 at Halifax. That’s because the £1,999 fee completely eroded the headline rate.

What’s worse is these massive fees aren’t always as apparent as they are in the table above.

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Short term relief, long term grief
Of course, many homeowners won’t have two grand lying about when they remortgage. So when their lender offers to add the fee to their mortgage, many are tempted into doing it. The problem is that, while it is cheaper to add the fee to the mortgage over the short-term, you are forced to pay interest on it for the duration of your mortgage. This means that you can end up worse off adding a large fee (£1,999 in our example) to your mortgage, especially if you mortgage is a small one.

Again this shows that choosing a low rate re-mortgage that comes with a big arrangement fee is a bad idea for those with small mortgages. But, even if you have a small mortgage, it can still be worth re-mortgaging. The Lloyds TSB deal in the example below worked out £423 cheaper over the two-year re-mortgage period and £163 cheaper over the full mortgage term, even with adding the £499 fee.

Lender	Fee	Rate	1-year cost	2-year cost	20years
Halifax	Add £1,999	5.99%	£4,612	£9,224	£113,173
Lloyds TSB	Add £499	6.89%	£5,202	£10,404	£112,327
Lender’s SVR	FREE	7.5%	£5,625	£11,250	£112,500

Based on £75,000 interest-only mortgage

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Mortgages need smaller rates
Of course, not all of us are that far down the road on our mortgage repayments so that we only have £75,000 left to pay off. The larger your mortgage balance, the less important the size of the fee becomes and the more significant the headline rate of interest becomes.

Let’s assume you owe £250,000 (roughly enough for a small closet in London) and are in the market for a new mortgage.

Lender	Fee	Rate	1-year cost	2-year cost	20years
Lloyds TSB	Pay £1,999	5.99%	£16,974	£31,949	£369,449
Lloyds TSB	Add £1,999	5.99%	£15,095	£30,189	£370,388
Halifax	Pay £499	6.89%	£17,724	£34,949	£372,449
Halifax	Add £499	6.89%	£17,259	£34,519	£372,692
Lender’s SVR	FREE	7.5%	£18,750	£37,500	£375,000

Interest-only mortgage, £250,000

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To pay the fee or add it?
You can also see from the table above that the size of the fee and whether you choose to pay it upfront or add it to the loan has much less of an impact on the cost of a re-mortgage than it did on the earlier example using a £75,000 mortgage. The lesson here is that if your mortgage is large, say £250,000, then the rate is all-important.

The decision to pay the fee or add it will largely depend on how much you need to reduce your mortgage costs in the short-term; if it’s essential to get costs down now then add the fee, if you can live with shelling out on the fee then pay it.

Of course, the more often you re-mortgage, and if you choose two-year deals you could end up re-mortgaging ten times in twenty years, the amount you end up shelling out on fees or adding to your mortgage will grow. So, there is an argument for picking longer-term re-mortgage deals, say for five years, when rates are cheap and paying fees when you can. As long as you are not paying an SVR you will come out ahead, unless rates suddenly fall to super-low levels.

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Fees are bad, SVRs are worse
In case you were wondering, we added the lender’s standard variable rate to the tables to highlight just how phenomenally expensive a mistake it is to not re-mortgage at all. Consider this: after just two years, you would have shelled out £5,500 more than you needed to.

Mortgage lenders set their SVRs so high in the hopes they will catch out a few people through inertia. Make sure you aren’t one of them

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Article produced by EveryInvestor.co.uk