Tighter controls on home loans mean more pain for borrowers

Published 24th Oct 2009

Fees are likely to rise as lenders pass on the cost of greater checks on mortgages


Borrowers have been warned that mortgage fees could soar after the City regulator called this week for lenders to assess income and spending in greater detail before approving loans.

Lenders are already under fire for introducing application charges of up to £1,000, which you lose if you back out or the loan offer is withdrawn — a not uncommon problem in today’s tricky mortgage market.

Brokers say that plans by the Financial Services Authority (FSA) to make all borrowers pass an “affordability test” that scrutinises their spending habits mean that fees could go even higher.

Melanie Bien, of Savills Private Finance, a broker, says: “Any step-up in regulation means more cost, and higher costs tend to be passed on to consumers. Lenders are likely to favour higher charges over the alternative option of increasing interest rates as it is a less visible way of raising costs. This will be unhelpful, especially for first-time buyers, for whom every penny counts.”

Experts have warned that the FSA’s proposals could herald a return to the Seventies, when lenders interviewed and carried out longwinded checks on every borrower.

One way for lenders to recoup extra administration costs would be to raise application fees, also called booking, product and arrangement fees. These allow you to reserve a mortgage rate offer when your application is agreed in principle, and cover some or all of the lender’s costs for setting up your loan.

Application fees have crept up already. In 2002 a typical arrangement fee was about £195 to £295, according to FSA research. By 2009 the fees for the same sample of lenders ranged from £299 to £1,995.

Stephen Foden, of Propertydating agency.com, a property website, says: “The property market is slow at the moment and by the time people come to sell their homes they could be in for a nasty surprise when they see just how much they have to pay in their mortgage arrangement fee. Many are rising dramatically.”

Mortgage brokers also say that the range of fees is increasing and becoming more confusing. A further worry for borrowers is that a growing number of lenders have recently introduced a non-refundable element to their application fees, which has to be paid up front. This means that borrowers can end up paying a fee even if their application is cancelled.

According to a survey for Times Money by Defaqto, an independent research company, at least 19 lenders, including HSBC and the state-backed Lloyds TSB, have non-returnable charges. Last month Nationwide, Britain’s biggest building society, said that it would reject applications if a non-refundable booking fee of £99 was not attached.

In most cases the non-refundable element costs a few hundred pounds, although HSBC charges a booking fee of up to £1,199 on some of its residential mortgages.

Although small compared with the overall cost of a home loan, many borrowers find such fees an unwanted burden at a time when money is already tight.

David Black, of Defaqto, says: “For the mortgage provider there is obviously considerable expense in terms of administration and cost in dealing with mortgage applications. Non-refundable fees are a way of covering such costs.

“But potential borrowers need to keep their wits about them as the fees can appear under many different names: application fee; arrangement fee; booking fee; product fee; reservation fee. Adding to the confusion, in some instances ‘non refundable’ fees can be refunded or transferred to another product with the same lender.”

Banks and building societies argue that the fees have been introduced to protect themselves from consumers who change their minds.

Borrowers remain jittery amid widespread nervousness about the apparent house price recovery and volatility in the mortgage market — with deals appearing and then disappearing in weeks. This has made them more likely to pull out of a deal at the last minute.

James Thorpe, of HSBC, says: “We only make a charge once we have carried out a credit check, agreed to lend to you and you have signed for the mortgage. In many cases we will have reserved funds for you. There are costs for reserving those funds, whether you decide to go ahead with the mortgage or not.”

Most lenders will refund the charge in special circumstances, although they are rarely explicit about this on their mortgage applications.

If you decide not to go ahead because the valuation does not meet your expectations, in most cases the fee will be returned. However, if you pull out because you have seen a cheaper deal or change your mind about buying, you will lose out.

Experts warn that a lender may also refuse to return the fee if mistakes spotted later on your application disqualify you from the mortgage.

David Hollingworth, of London & Country Mortgages, another broker, says: “If you fail to meet a completion deadline — usually three to six months — or your mortgage offer expires, you could also lose out. Given the current state of the market this is proving more of a problem, as the time between application and completion has grown.”

Brokers say that you should always challenge your lender if you believe that you have been charged unfairly. However, even in cases where the fee is returnable, consumers say that banks and building societies are slow at handing it back, as Rachel Harrison, a Times reader, discovered.

When Ms Harrison, from London, applied for a £370,000 Abbey mortgage she was told that there was a non-refundable upfront fee of £1,495. However, she was assured that this would be charged only if she pulled out of the deal. Her adviser told her that Abbey did not charge fees in cases where it rejected an application before the valuation, if the property was downvalued or if the surveyor thought that the property had inadequate security.

The valuation fell short and Abbey was not prepared to offer more than £300,000, which meant that Ms Harrison could not press ahead. But the bank, which is owned by Santander, took the money and failed to refund it until Troubleshooter stepped in.

Abbey’s failure to return the fee was an administrative error, but Ms Harrison says: “If I hadn’t complained, I’m not convinced that I would have got the money back”.

So what fees will you pay on the top deals today? The cheapest two-year tracker up to 70 per cent loan to value (LTV) is from Northern Rock, according to London & Country Mortgages. It pays 2.19 per cent above base, giving a pay rate of 2.69 per cent, and has an arrangement fee of £595, which is payable only at completion.

RBS has a tracker for first-time buyers only, available up to 90 per cent LTV, at 4.19 per cent above base — a pay rate of 4.69 per cent — with no arrangement fee.

If you prefer the security of a fixed rate, non-refundable fees become an issue. First Direct offers a two-year fixed rate at 3.69 per cent up to 60 per cent LTV with a £498 fee, of which £299 is non-refundable.

Meanwhile, HSBC offers the cheapest two-year fixed, up to 90 per cent LTV at 5.99 per cent with a £599 non-refundable booking fee.

Regulator’s plans

Impose tighter checks on affordability.

Lenders to be responsible for assessing a consumer’s ability to pay.

Ban self-certification mortgages and require all borrowers to verify income.

Ban on loans to borrowers that pose a “toxic combination” of risks.

Buy-to-let mortgages to be regulated by the Financial Services Authority.

Prohibit practice of adding application fees to a loan.

Freeze arrears charges when a borrower is making some repayments.

Source: ' Times '

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