Arrangement Fees – The Basics
According to the Financial Services Authority (FSA), an arrangement fee is a ‘commitment or administration fee usually payable to the lender to reserve the mortgage funds’. As interest rates have fallen over the last few years, many mortgage providers have introduced mortgage arrangement fees or, alternatively, increased the cost of existing fees.
The size of an arrangement fee can vary from a couple of hundred pounds up to one percent of the mortgage value, which can be a sizable sum. Nowadays, if you require a fixed rate or discounted mortgage you will probably have to pay an arrangement fee.
Arrangement Fees – Options
Before you decide upon a mortgage offer, you should look very carefully at any conditions associated with the arrangement fee. Some lenders expect you to pay the arrangement fee when you submit your mortgage application (and may be reluctant to refund it if you decide not to proceed with their mortgage offer). Other lenders add the arrangement fee to the loan, which means that you will be paying more interest.
If you are using a Mortgage broker to obtain a mortgage, it is likely that the broker will also charge a fee, so be sure to ascertain how much of the arrangement fees go to the broker and how much to the mortgage lender. Bear in mind that you may end up paying two separate lots of fees, one to broker and one to the mortgage provider. You may be able to reduce the broker’s fee by obtaining life insurance cover via the broker, with the broker’s commission on the life insurance policy offsetting some or all of the cost of the broker’s fee.
Arrangement Fees and Interest Rates
In today’s competitive mortgage market some financial institutions are using a combination of higher arrangement fees and lower interest rates to manipulate mortgage comparison web sites’ best buy tables. Some mortgage providers are offering loans at rates below the Bank of England Base Rate in order to improve their ranking in the comparison tables. They then attempt to balance the effects of this low rate by charging a high arrangement fee.
Borrowers requiring large mortgages (over £200,000) may be able to use this strategy to their advantage, but other borrowers would usually be better taking a mortgage with a lower arrangement fee and a slightly higher rate of interest. Whatever they decide, borrowers need to do their mortgage calculations carefully in order to obtain the best deal for their own personal circumstances.
Summary
Most mortgage providers charge an arrangement fee on a new mortgage; some mortgage lenders expect the arrangement fee to be paid in advance, whereas others will add it to the mortgage loan; certain mortgage lenders offer low interest rate loans coupled with high arrangement fees in an attempt to obtain more favourable ratings in mortgage comparison tables.
