Not renewed your self-employed mortgage in a while? You may be in for a surprise – the nasty sort – when the time comes. Lenders arrangement fees have risen. We think we know why…
In 2009, the average a lender would charge for the privilege of processing your mortgage application was less than £1,200. In the short time since, that amount now stands at £1,500+, a rise of more than 25%.
Why have arrangement fees risen so much so quickly?
These rises became prevalent as the now-defunct FSA” tightened banks’ lending criteria. The FCA”, the FSA’s successor, has done little to reverse the logic behind this increase.
That logic therefore remains that only those who can truly afford a mortgage will be granted one. Hence, successful applicants pay that little bit extra for the lender to shuffle funds from one place to another.
In the past, this wouldn’t have been an issue. Most lenders, either looking for new business or hoping to secure existing, would waive the fees in return for your signature. But not any longer. Why? Because, generally, banks no longer have to.
The market has changed, lending criteria making even those previously creditworthy worthy of investigation. Lenders know they don’t need to offer such a bung, as only the most squeaky-clean credit profiles can access mortgages.
The relief at securing a mortgage at all is often enough of a sweetener to entice most people to sign on the dotted line, regardless of any fees.
Has the low BoE 0.5% base rate really helped?
When we look at the interest rate charged by lenders before the property bubble burst in 2007, it’s hard to understand why keeping up mortgage payments is so difficult now.
Tracker mortgages hover between 0.5 – 1.0% above the base rate. Fixed rate mortgages are typically between 3.0 – 4.5%. There are exceptions either way, for sure. But they’re still a lot lower than the 5-6% we were paying six or seven years ago.
The problem lies not with the interest rate itself, but with the value of the property – hence mortgage – upon which the interest is calculated.
Many, many people either bought new or remortgaged in the run up to the banking collapse. Instead of paying 5-6% on an outstanding mortgage of say £50k, they’re now paying 3-4% on balances of £120,000! And that’s the lower end of the housing market.
In a roundabout way, this is not all bad news for self-employed people trying to get on the property ladder.
Higher fees may be the least of our worries
One more reason why banks have been able to get away with increasing arrangement fees is because they tag it on the end of your mortgage. It’s almost as if it’s a throw-away comment:
“Oh, yes. The £1,500 fee. We’ll just pop that onto the end of your mortgage. You won’t feel a thing…”
Many people will be affected by the double-edged sword the banks are wielding. Those whose interest-only mortgages have underperformed need to be wary. As do those whose 5-year fixed term mortgages taken out in 2008/2009 come to the end of their introductory term.
Even when mortgage interest rates were higher, introductory fixed rates were reasonable. Those who were enticed to remortgage may have a rude awakening when they step off their existing rate.
Compounding the impact may be their inability to remortgage and end up stuck with a lender’s SVR”. Just because they were creditworthy then doesn’t mean they are now.
Many homeowners have become “mortgage prisoners” in precisely this manner. With the way the market is shaping up, we expect more will, too.
The silver lining for contractors
Interest-only mortgages are rare and come with a requirement of large deposits and proof of a failsafe repayment plan. Self-cert mortgages dead and buried.
These were the two most popular forms of mortgages for contractors. Their erratic income suited paying off large chunks of their mortgage periodically.
Conversely, repayment mortgages penalised people for paying off sizeable amounts in this manner. Nowadays, that’s less likely to be the case. This is a great opportunity for self-employed people to make the most of their income in the way they’re used to.
Rather than face an arrangement fee to transfer to another mortgage provider, they could pay off greater amounts of their balance. This may not bring the interest rate down, but the balance outstanding upon which the interest is calculated will be less.
Alternatively, contractors can use a specialist self-employed mortgage advisor. Being aware of the way company directors, sole traders and contractors pay their mortgages, specialist brokers have negotiated deals with lenders beyond the High Street branch.
Whether you choose to use such a service or go to the High Street (good luck with that), it’s worth keeping an eye open for the arrangement fees. Not only how much, but if they’re added to the balance of any presumed debt.
Specialist brokers will have negotiated to reduce or even waive fees for the self-employed to secure their business, based on inherent experience of contracting.
On the High Street, it’s highly unlikely you’ll get such a knowledgeable or sympathetic response to your self-employed mortgage application. And, of course, the incumbent arrangement fees.
Author: John Yerou
John Yerou is a pioneer of contractor mortgages and owner and founder of Freelancer Financials, Contractor Mortgages®, C&F Mortgages and Self Employed Mortgages, trading styles and brands of the award-winning Mortgage Quest Ltd.