A month of rising mortgage rates and fees

Scott Hanton, mortgage analyst at moneyfacts.co.uk comments: "As expected, most mortgage lenders have now increased their standard variable rates, revised their mortgage ranges and increased their tracker products following the November base rate rise. However there have also been some other more unexpected adjustments – by way of increased arrangement fees.

“November saw 11 major mortgage providers, including Abbey, Nationwide and Northern Rock, which all sit within the top five mortgage lenders (based on CML statistics), increase their arrangement fees by as much as £200, switch to percentage based fees or introduce fees on products which were previously fee free.

“With all the commotion in the mortgage market following the base rate rise, lenders may be taking this time of uncertainty to pass on fee rises, in an attempt to make them go unnoticed as consumers focus on their interest rates.

“So why are we continuing to see substantial rises to mortgage fees, as surely with automated systems the timing and cost of processing a mortgage should be greatly reduced?

“To remain the ‘top rate’ provider, lenders are often needing to offer very low headline rates, sometimes below the cost of funds. Many of the examples above include best buy deals, so it is clear that the lenders may use fee income to substitute or bolster interest income.

“There is also an alterative motive for the lenders to generate additional fee income. Fee income can be used to predict business growth forecasts to shareholders, whereas interest turn (profit margin) is excluded.

“However, by using fees to counter lower rates, it makes the comparison process for the consumer much more complex. To find the best deal, it is no longer sufficient to look at the interest rate; they must consider the upfront arrangement fees, exit fees, higher lending charges, incentives and redemption clauses, to name just a few factors.

“Not only has the mortgage selection process become more complex, it is also now very costly, particularly for consumers opting for short term deals. The increased cost of fees can make these deals uneconomical.

"If fees continue to increase at this rapid pace, it could have a negative impact on the competitiveness of the market. Borrowers may be put off shopping around for deals, if the initial costs grow too large. Imagine having to pay £1,000 plus every two, three, or five years. You would have to secure a pretty special rate to make this worthwhile.”