Banks and building societies are making a fortune out of a rush to take out fixed
rate mortgages as homeowners panic about interest rate increases.
With uncertainty surrounding the timing of future interest rate rises, borrowers
are favouring fixed-rate mortgage, according to The Council of Mortgage
Lenders, the industry voice of the UK’s major banks and building societies.
Fixed rate deals hit a low of 45% of all loans in May 2010. In February, 57% of all
mortgages advanced were at a fixed rate, up from 52% in January.
Sheltering in a fixed rate comes at a cost for borrowers.
The average mortgage arrangement fee is £1,044, but the average fee for a fixed
mortgage is £1,054 compared to £1,017 for a tracker mortgage, according to
independent comparison site uswitch.
Borrowers can choose to pay the fee in cash or add the amount to their mortgage
– and the second option can end up costing around £3,519 in extra interest.
Many borrowers would be better off paying the fee on a 0% credit card and
paying the balance off in the low interest period.
Uswitch reckons lenders are picking up £2.6 billion in set up fees for fixed rate
mortgages. The biggest fee is £1,875 that will cost the borrower £3,060 over 25
years if added to the loan.
Michael Ossei, lending expert at uSwitch.com, said: “With a potential base rate
rise looming, more people are being tempted to fix their mortgage. With higher
arrangement fees, this is a real catch-22 for consumers who are struggling to
find the funds to pay mortgage set-up costs and who fall into the trap of adding
them to their mortgage. It may be convenient, but it comes at a hefty cost. For
first time buyers especially, these fees could be what stops them getting on the
ladder. Adding fees to a mortgage will see the cost snowball.
“Adding arrangement fees to a mortgage should always be seen as a last resort. If
you cannot afford to pay them upfront, putting the fees on a credit card offering
0% on purchases can help spread the cost painlessly. Consumers just need to
make sure they can pay the amount off in full at the end of the introductory
period.
“Regardless of how and when people choose to pay these fees, they must do their
sums carefully. They should also ask for figures to show the overall impact on
the amount of interest paid. By doing your homework into what mortgages are
available, and what options there are for putting your fees on credit, you can make sure you don’t get stung.”
