There can be some misunderstanding surrounding lender arrangement fees, which have generally increased to unprecedented levels over the last 12 months as a result of the ‘credit crunch' and reducing lender profits. Although lender fees can sometimes be looked at in a negative light, for many products they actually favour borrowers.
By paying a greater arrangement fee, which is usually added to the mortgage, borrowers can very often secure a more competitive interest rate. If the mortgage borrowing is at a reasonable level, the lower interest rate can offset a high lender fee and provide a significant sum of interest saved on top. In other words, you can save money by absorbing a fee.
The advent of higher lender fees has mainly been of benefit to consumers.
Mortgage lenders need to make profit to remain in business, and by charging a fee up front, they can offer a lower interest rate. Thus clients benefit from lower monthly payments, which can be critical in achieving the required mortgage borrowing.
To eradicate or reduce lender fees would result in higher interest rates. Many of the main lenders, such as Halifax, Cheltenham & Gloucester and Abbey, offer clients a choice between lower rates with high fees or higher rates with lower or no arrangement fees.
This is where a good independent mortgage broker can provide invaluable advice – to identify the most suitable product for clients from the thousands available in the market.
Some lenders will offer market-leading headline rates but with arrangement fees of up to 2.5 per cent of the loan amount. In simple terms, a 2.5 per cent fee on a two-year rate at 4.99 per cent would effectively mean an additional 1.25 per cent per annum on top of the rate. In other words, the actual rate is not 4.99 per cent but 6.24 per cent!
Again, some clients would be happy with this arrangement because the most important thing is to achieve the lowest possible monthly payment. They tend to write off the lender fee because it is added to the borrowing, thus it does not need to be paid up front. Brokers must be careful with their advice in these situations as the Financial Services Authority (FSA) are continually concerned about clients borrowing above their means.
The confusing aspect of the market is that some lenders charge high arrangement fees without offering a better interest rate. Again, it is vital to use the services of an independent mortgage broker… it's rarely as simple as following the cheapest rate or lowest arrangement fee.
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