I'm just coming to the end of my first 3 year fixed rate mortgage, and I am going to move onto a 2 year fixed rate. Now, the bank are wanting an 'Arrangement Fee' to set this up. They said I can pay it up front in one lump sum, or I can add it to my mortgage. Obviously this will incur interest. But it would put my mortgage up by only around £4 per month to do it this way. What I don't understand is why it costs so little per month? She said that it's this low because it is spread out for the duration of my (22 years) mortgage. But I am getting a 2 year fixed rate, and maybe move my mortgage elsewhere in 2 years time - so shouldn't I be paying for the arrangement fee over 2 years instead of 22 years? Or if I did leave in 2 years time would I have to pay the rest of the arrangement fee up to my current lender?
Tell em you're off somewhere else. At the end of 2 years they'll add the arrangement fee plus stupendous interest on to the settlement figure. I'd approach an Independent Financial Adviser mate, don't just take what you're given.
It's because they are adding the arrangement fee to your mortgage - thus it has become part of the debt that you have to repay. So, if your outstanding mortgage is £100,000 and the arrangement fee is £500 then your new level of debt would be £100,500. If, after 2 years, you switch lender then you still have to pay the amount of mortgage outstanding, which includes the arrangement fee. So, in effect, you are paying interest on the arrangement fee as they are lending it to you. If you pay it up front then it will be cheaper because you don't have to pay any interest on it. Interest on £500 spread over 22 years will probably cost you around £1056 - that is a total of £556 in interest. If you switch after 2 years then you'll end up paying mostly interest on the £500 and hardly any of the capital - so you would still owe the majority of that £500. It only makes sense to add the arrangement fee to your mortgage if you cannot afford to pay it up front and it still works out cheaper than automatically reverting to the variable rate. Make sense?
Excellent answer mate, thank you very much!! FWIW my advisor said the deal we've been offered beats what he can find. He's usually very good with his advice, but this time i'm not so sure. If I say that I'm leaving my current lender is there a chance they might offer a better deal, or are they set in stone these things?
To be fair mate if your advisor says that sit tight, but as Epsom chap says, don't add owt to your debt. Bit of a piss take innit though ? 'arrangement fee'
I recently had an issue with "The Halifax" regarding a "mortgage account fee" (in addition to the "arrangement fee"). They told me I couldn't pay this until the mortgage was paid off then added it on to the mortgage thus incurring variable interest on my fixed interest deal. It turns out this is not true and that I could have paid it at the start - they've had to compensate me since. Snake-oil salesmen the lot of 'em. My advice is pay all the fees at the start - it really pi55es them off.
question is, is tehfixed rate lower than the variable rate you will move on to if you do nothing just now? Rates are unlikely to change in the next 3 years so if it isn't save the fee and save money in the meantime.
Thank you all, this thread is really opening my eyes as I really am a complete novice at this sort of thing - it's all new to me.
Complete pi55 take. Just another way for the bank to screw over the customer, make a fortune and get away with it. #captive audience.
Have you ever thought about a Repayment Mortage !! this way you are paying a bit off the Capital each month as well as interest , & if youve got any spare dosh you can pay a lump sum off the capital every so often to bring down the Debt ??
You're most welcome. It's gratifying to be able to help out a fellow human-being with just a few typed words. Good for the soul! One thing I would consider if I was you is whether you really wish to switch to a 2-year fixed deal anyway. It's probably cheaper to stick with the standard variable rate that you will now move on to. The benefit of fixing a mortgage payment is that if the lender raises interest rates then you will be protected from that rise for 2 years - it gives people peace of mind. However, due to the financial repression policies of the Bank of England and the current administration, it is highly unlikely that interest rates are going to rise at all over the next 2 years anyway. So the question to ask yourself is whether you are prepared to pay extra each month fixing your mortgage deal, but be secure in the knowledge that your payments will stay the same for two years regardless, or whether you want to pay less each month (plus not having to pay that arrangement fee) but have the small risk that interest rates rise within 2 years. Say, for the purposes of illustration, the proposed 2-year fixed deal is £500 per month but the current variable rate would mean you're paying £450 per month - then you would be worse off unless interest rates rise to such a level that the variable rate rises above £500. In this example I would be tempted to stick with the variable rate - pay the £450 per month and use the extra £50 per month you were prepared to pay to overpay the mortgage. That extra £50 overpayment pays the capital directly - over 2 years that would wipe £1200 off the amount you owe. In the current economic climate using the current low rates of interest to pay off extra mortgage capital will save many thousands of pounds and reduce to term of the mortgage. If you're in a position to do this then it is well worth considering. Make sense?
It's a massive piss-take. The arrangement fees they charge seem to imply that it takes them a very highly-skilled individual a whole day working on arranging the new mortgage deal. I doubt whether the true cost of arranging a switch is even close to 10% of that figure. In other words 'a piss-take'. I fecking hate the ******* banks...
Tracker for me. The overall interest rate was lower than fixed/standard variable rate and like you say there's not much chance of base rate being raised (touching wood and crossing fingers).
Another stupid question for you then from this moron who has no clue. Now my fixed rate is coming to an end, is the variable rate i'll be moving onto a blanket price, or individually set by my bank? ie any ideas what the variable rate will be?
No it's not a blanket rate. It is a rate that will be set by your lender. Phone or email them and ask them what your monthly repayment would be if it switched to the variable rate at the end of your current fixed term. Compare that to what they say it would be on a 2-year fixed deal. Go for the one that makes most sense to you. The cheapest is probably going to be the standard variable rate - but the risk is that it may increase. It's a small risk in my opinion - but could happen. That's part of your decision making process. When making your calculations don't forget that they are asking you to stump up some more money to switch to another 2-year deal in the form of an arrangement fee. Fixing for 2-years is not a long time - you'll soon be back in the position you're in now. Are you prepared to pay fees by fixing every 2 years? It's up to you, but don't make such a key financial decision without having all the facts available.
One of the best decisions I made was switching to an offset mortgage back in 2002. They are great products, so long as you have savings. Offsets work by taking your current mortgage liability then they deduct your savings and only charge interest on the difference. So if you had a £200k mortgage and £10k in savings and current accounts then they would only charge interest on £190k. The reduction of interest charged means more capital is repayed each month. You would receive no interest on your savings as that was offsetting the mortgage. The beauty of that is the interest rate on the mortgage is invariably higher than that of savings accounts and because you are not earning interest on savings you don't have to pay tax on that interest - saving 20% or 40% for higher earners. We took out that product and decided to overpay the repayments whenever we could. That came directly off the capital thus reducing interest payments further. Coupled with offsetting the affect it had on capital snowballed. We're almost finished paying the mortgage now several years ahead of schedule and saved many thousands on interest. Offsetting is great - if you have savings; especially now that you can't get a decent return on savings.
How do you go about paying more than your repayments? Say at the end of the year you've saved a couple of grand, but you fancy paying a bit of your mortgage off rather than leaving it in a savings account, can you just go up to your mortgage provider hand them a cheque and ask them to put it towards your mortgage? I know I sound like a right numpty, but I am one. Also, do you get penalised for doing this and paying your mortgage off early?
Totally agree, its a no brainer if you have a mortgage and savings IMO. Unfortunately we don't have savings for long, we find something to spend it on. We are planning on an offset once we have no dependents.