BRITAIN’s banks and building societies have been accused of cashing in on rate rises by bringing back “toxic” schemes that were phased out in the 1990s.
Northern Rock, Alliance & Leicester and Portman building society are all offering the schemes, which lure you in with a cheap deal only to lock you in to a higher rate after the discount period ends.
Borrowers who want to get out must pay extended redemption penalties running to thousands of pounds.
These were virtually eliminated following a Sunday Times campaign in the 1990s, but they are now making an unwelcome comeback as lenders seek to recoup the cost of market-leading deals.
David Hollingworth at L&C, a mortgage broker, said: “Lenders have been sneaking extended redemption penalties into their deals to keep headline rates as low as possible but boost profits by the back door. They are toxic and are best avoided, however attractive the rates appear to be.”
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Northern Rock has launched a fixed-rate deal at a market-leading 4.99% until September 1, 2009. But borrowers taking advantage of the low rate face early-repayment charges until September 2011. When the special-rate offer comes to an end, they are locked into paying a tracker rate of 1.99 percentage points above Bank rate, currently 5.75%, which adds up to 7.74% close to its standard variable rate, which is expected to rise to 7.84% The exit fee is set at 4% of your original loan. So, someone who has taken out a £250,000 mortgage would have to pay a penalty of £10,000 to get out before September 2011. A similar fee is being charged on two of its other “low-cost” deals.
Ray Boulger at John Charcol, a broker, said: “Northern Rock has tried to hide the penalties by euphemistically labelling the mortgages Fix and Track. But they are really nasty fixed rates with extended redemption charges.”
Alliance & Leicester has also been criticised for launching a deal that is fixed at 2.99% for one year. It has penalties until 2012, tying borrowers into an uncompetitive tracker rate, at present 6.84%, for a further four years.
A&L and Northern Rock insist the charges are clear. Northern Rock said: “To suggest anything is hidden is incorrect. We are just offering choice to the customer.”
Other lenders that offer home-loan products with extended penalties include the Ipswich, Newcastle and West Brom-wich building societies.
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Lenders have also been using valuation charges to boost profits. On a £250,000 property, a typical valuation costs between £500 and £800, compared with £300 a few years ago.
However, the cost to the lender has been falling. Some valuations involve a qualified surveyor inspecting a property, but thousands are so-called “drive-by valuations” where surveyors simply drive past your property to confirm it exists.
A growing number take place in an office using a computer to calculate the value of a home using local house-price data, which can cost the lender as little as £20.
Julia Harris at Moneyfacts, a research firm, said: “With large variations in the size of fees, the valuation must be another part of the mortgage package to compare when you go shopping for the best deal.”
Lenders are increasingly using sky-high arrangement charges to manipulate rates. Many of the deals with the lowest headline rates charge an arrangement fee also called a booking or reservation fee of £1,000 or more now, compared with about £400 two years ago.
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A loan with a low headline rate but high fee may not offer the best value. Halifax, for example, has a tracker that is 0.51 points below Bank rate for two years, or 5.24%, with a £1,499 arrangement fee. The total cost on a £100,000 interest-only loan over the two-year term, factoring in the fee, would be £11,979.
A borrower would pay £500 less by choosing a two-year tracker from Alliance & Leicester with a higher headline rate. It charges 0.31 points below Bank rate for two years, or 5.44%, with an arrangement fee of £599. The total cost over two years is £11,479.
Martin and Marion Fahy from Manchester opted for the Alliance & Leicester deal after comparing the costs.
Marion, 50, who works in the accounts department at the University of Manchester, said: “Fees have shot up since we last remortgaged so it has become essential to take them into consideration.”
Some lenders make it more difficult by charging a percentage fee based on how much you borrow rather than a flat fee. The highest is Northern Rock’s 3.5% on its 4.79% two-year fix. Someone borrowing £250,000 would have to pay £8,750 just to set up the mortgage, while a person looking to borrow £1m would face a fee of £35,000.
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Expensive flat-rate fees can be worth paying it all depends on the size of the mortgage. The larger the amount of the loan, the less of an impact the fee has. However, with percentage fees, the opposite is the case: they are only worth paying on small loans, and even then, it will depend on the size of the fee.