Not renewed your self-employed mortgage in a while? You may be in for a shock—and not a pleasant one—when the time comes. Lenders’ mortgage arrangement fees have risen, but don’t take them at face value…
In 2009, the average lender arrangement/product fee was less than £1,200. In 2013, that rose to £1,500+, a rise of more than 25%. Come 2020, many fees hover around the £1,000 mark. So they’ve dropped, then? Is that right?
Yes. And no. Mortgage Arrangement, or Product fees are not all as clear-cut as a one-off payment. Variables you need to know about determine the final fee.
Why have arrangement fees risen so much so quickly?
Deposit and interest rates can fluctuate to make the ‘arrangement fee’ look attractive. MoneySaving Expert sums it up succinctly:
Beware low rates disguising high fees.
Cunning lenders often use high fees to make their interest rates look more attractive, so they rise up the best buy tables. Some charge fees of £2,000+. Expect to pay a fee of at least £1,000 to secure an attractive rate.
Rises came to prominence when the now-defunct FSA tightened banks’ lending criteria. The FCA (FSA’s successor) has done little to reverse that logic since taking the reins.
That logic, then, remains that only those who can truly afford a mortgage will get one.
Unwittingly, successful applicants often pay for lenders shuffling fees from one place to another.
It’s this now-you-see-it-now-you-don’t policy that can make a mockery of the fee itself.
Wave the waive bye-bye
It hadn’t used to be like that. Most lenders, seeking new business or securing existing, would waive the fees. But not any longer. Why? Because, in general, they no longer have to.
The market has changed, lending criteria making even those once creditworthy worthy of investigation. Only borrowers with the most pristine credit profiles can access mortgages.
Hence, lenders know they no longer need to offer such bungs, and maybe even charge a little more. Often, the relief of getting a mortgage at all is the only sweetener they need, regardless of any fees.
Has the low BoE base rate helped any?
Mortgage interest rates charged before the property bubble burst in 2007 are unthinkable today. That’s not to say they’ll never return to 6%. But it begs the question, why are people struggling with interest rates so low now?
There are good reasons. Tracker mortgages hover between 0.5-1.0% above the base rate. Fixed rate mortgages range 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 in 2007.
The problem lies not with the interest rate alone. It’s also the value of the property (hence mortgage) upon which interest is calculated.
Many, many people either bought new or remortgaged in the run up to the banking collapse. Investment in property, with prices spiralling upwards, looked too good to be true.
Like all dangling carrots, if they look too good to be true, they usually are. New homeowners were paying 5-6% on their existing mortgage. They’re now paying 3-4% on the balance of the new, higher mortgage they took out.
In a roundabout way, this is not all bad news for self-employed people trying to get on the property ladder.
Higher arrangement fees may be the least of our worries
With low deposits post-lockdown as rare as hen’s teeth, it’s a tempting option for many.
It’s almost as if it’s a throw-away comment:
“Oh, yes. Your £1,500 arrangement fee. We’ll just pop that onto the end of your mortgage. You won’t feel a thing…”
The double-edged sword that banks are wielding will affect many homeowners.
Those whose interest-only mortgages have underperformed need to be wary. Always check that your repayment vehicle is performing as well as it should.
Those with 5-year fixed term mortgages need to weigh up their options, too. With today’s low interest rates, is it worth getting out of your existing deal early? Get advice on your redemption fee; is it worth sacrificing your current 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.
The Mortgage Prisoner Conundrum
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. Since the market opened up after lockdown, lenders are changing their criteria daily!
Many homeowners have become “mortgage prisoners” in this exact scenario. With the way the market is shaping up, we expect more will, too.
Mortgage options for contractors
Interest-only mortgages have started to make a comeback. But they come with large deposits (low LTV) and proof of a failsafe repayment plan.
Self-cert mortgages are long since dead and buried. Even though companies still advertise them, including renowned sites, they’re just ‘clickbait’. You can no longer self-certify your income to get a mortgage.
Interest-only and self-cert were the two most popular forms of mortgages for contractors. That’s because their often erratic income lent itself to periodically paying off large chunks of their mortgage.
Conversely, repayment mortgages often penalised people for paying off sizeable amounts. Nowadays, that’s less likely to be the case, with lenders more amenable to overpayments. Self-employed people on repayment mortgages now should optimise their income this way.
Think about the arrangement fee you might pay to transfer to another mortgage provider. Why not pay off a lump sum and reduce the balance, instead? It may not bring the interest rate down. But the balance outstanding, upon which you pay interest, will be less.
Still not sure? Talk to a Mortgage Specialist
If it all seems too much, contractors can use a specialist self-employed mortgage advisor. You’re not alone in needing expert advice. We have many returning clients who know what a battlefield they face flying solo.
Specialist brokers are aware of the way company directors, sole traders and contractors work. They’ve often negotiated bespoke deals with lenders beyond the High Street branch. Thus, they can often access mortgages that work for the self-employed, not against them.
Whether you choose a broker or the High Street, scrutinise any arrangement fees first. Not only how much, but if they’re added to the balance of any presumed debt. Also, check what hike in interest rate will you pay for a lower product fee!
Specialist brokers will have negotiated with lenders, based on inherent experience of contracting. They can help reduce or even waive fees for the self-employed to secure their business
Don’t expect such knowledgeable or sympathetic responses to your application on the High Street. Look at the total cost of your mortgage before signing on the dotted line.
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.