Mortgage fee misery

Consumers are facing a double whammy on mortgage set-up fees, according to research from uSwitch.com, the independent price comparison and switching service.

Not only are they being asked to fork out £987 on average just to set their mortgage up, but if they then add this to their mortgage the amount could more than double to £2,094. This is allowing the mortgage industry to rake in an additional £8.7 billion on set up fees alone.

Over 2.5 million people (32%) fell into this expensive trap upon the advice of a mortgage advisor. This indicates that many simply did not have the cash available to pay the fees upfront, leaving them with little option but to spread them over the term of the loan. However, almost 900,000 fell into this money pit as the fees were added to their mortgage without realising they'd agreed to it.

The average mortgage set up fee is currently £987 but consumers could see this figure increase by 112%, to £2,094, if they decide to pay it back over the term of their mortgage. If consumers choose a mortgage with the maximum fee of £4,094, the situation is even worse. Over 25 years this fee will inflate to a staggering £8,682 - adding almost £30 to the monthly mortgage payment.

Ann Robinson, Director of Consumer Policy at uSwitch.com, comments: "This is a real catch-22 for consumers who are struggling to find the funds to pay mortgage set-up costs. In fact, by allowing consumers to add fees onto the mortgage, it could be argued that providers are doing them a good turn. This is particularly true for first time buyers where it could mean the difference between getting on the property ladder or not.

"However, adding fees to a mortgage means that you will be spreading the amount over many years and paying interest for the pleasure of doing so - this is an extremely expensive option and should always be seen as a last resort. If you can in any way manage to pay the fee upfront this will always be your best option. Otherwise buyers should make sure that they make regular overpayments to minimise the impact of high interest costs - as they could end up doubling the original cost of an arrangement fee.

"There are also transparency issues at play. Advertising APRs which appear to be competitive but are then subsidised with a fee of anything up to £4,000 is neither transparent nor consumer friendly. In many cases, people might be better off with a slightly higher APR and a lower fee - at least this wouldn't increase the actual size of the mortgage and cause them to pay additional interest on set up costs.

"In order to make an informed decision, people must ask the mortgage providers to provide details of the monthly repayments both with and without the fee added on to the mortgage. Consumers should also ask for figures to show the overall impact on the amount of interest paid."

Exit fees

The situation mirrors the long debated issue of exit fees. These currently stand at £163 on average, although consumers can expect to pay anything up to £295 to move to another provider. Cash strapped homeowners are increasingly adding these to their mortgage, with 30% (2.8 million) of those who incurred exit fees doing so. Again, almost one in three (32%) did so because their mortgage advisor suggested it. However, 166,320 had the fee added to their account without realising that they'd given their consent. Consumers could find themselves paying double as a result. Over 100 mortgage providers charge exit fees from £40 up to £295.

Robinson concludes: "The fact that almost 900,000 consumers found that arrangement fees had been added to their mortgage without realising they had given their consent is concerning. Mortgage arrangement and exit fees already cost a packet so consumers should always try to pay them upfront if they can. With 1.4 million people reaching the end of fixed rate deals this year, many could see their monthly mortgage repayments increase considerably if they can't find an equally competitive deal. Piling on almost another £30 a month for arrangement fees is just adding insult to injury.

"Increasingly, mortgage providers are using high arrangement fees to subsidise cheaper mortgage rates. Regardless of how and when consumers choose to pay these fees, they must do their sums carefully and ensure that they understand the impact they will have on the total cost of their mortgage. There are still lots of good deals around, many of which do not have any fees attached, so consumers really need to do their homework to make sure they don't get stung."

Example: Borrowing £150,000 on a two year fixed rate deal with Alliance and Leicester at 5.39% would cost £911 per month, taking the total cost of the mortgage over 25 years to £273,391. The arrangement fee for this mortgage is £3,000 which, if added to the loan would increase the total cost of the mortgage over the term to £278,858 - a £5,467 increase including the interest, instead of the expected £3,000.

Ann Robinson's top mortgage fee tips:

Look beyond the headline. A Key Facts Illustration (KFI) will provide you with a personalised quote for the total cost of a mortgage. Depending on your circumstances, a slightly higher monthly interest rate with no arrangement fee might be a better deal than a lower rate with a large fee up front.

Overpayments can save you money. The size of most mortgage loans and the standard 25 year term means that the amount paid back in interest is much greater than the amount originally borrowed. Reducing the outstanding capital by even a small amount makes a big difference. This could significantly reduce the cost impact of adding arrangement fees to a mortgage. Overpayments substantially reduce the length of your mortgage and therefore result in lower interest costs. You will however need to check with your mortgage lender to see what kind of overpayments they allow as restrictions often apply.

Ask for two mortgage illustrations, one with and one without arrangement fees: this will allow you to fully understand the impact on the total cost of your mortgage before making a decision. If you do not have the cash available to pay upfront, putting arrangement and exit fees onto a mortgage account is an option, but you should be prepared for the extra costs to be reflected on the monthly mortgage repayments.

If your mortgage advisor automatically adds the fees onto your mortgage without you realising, make sure this is rectified as soon as possible. If you have any problems with this, escalate your complaint to the FOS. If you don't it will cost you extra money in the long run.

Calculate the true cost of the mortgage by dividing the fee by the number of months the mortgage deal lasts. For example, a two year fixed rate mortgage with a £1,000 fee actually costs an extra £41 per month on top of the advertised APR (excluding interest).