You know something is wrong in the mortgage market when borrowers are willing to pay five figures just to get a new loan.
But that’s exactly what a lender relies on. This week Skipton Building Society took out a mortgage with a fee of 5 per cent of the loan value.
A borrower with a £200,000 mortgage would pay a hefty £10,000 for the privilege of remortgaging alone. That’s thousands before you’ve even started paying back the interest.
Look at the interest rates and you’ll see why Skipton is confident it will attract borrowers. They are comparatively very cheap and range between 3.35 and 3.59 percent with a two-year fixed price. According to MoneyfactsCompare, the average two-year fixed rate contract is currently 6.41 percent.
Debt restructuring fees have been around for years. However, so far they have ranged between £500 and £1,000 – with the most expensive option costing £2,000.
Fee weighted: This week Skipton Building Society took out a mortgage with a fee of 5% of the loan value, but interest rates range from 3.35% to 3.59%.
Skipton says its loan is designed for existing borrowers who would otherwise struggle to meet the affordability criteria required to refinance with a conventional loan.
Mortgage experts believe other lenders could follow suit with percentage fees if Skipton’s proves popular.
They have also gained traction in the buy-to-let market in recent months, with some loans charging a fee of up to 7 percent.
I’m sure many households struggling with mounting bills will jump at the chance to keep their mortgage payments under control for a few years – even if it means paying a sizable fee to cover them Paying off interest for years or decades will add it to your mortgage balance.
This is just the latest trick to make homeownership seem more affordable. In reality, the fees are little more than accounting tricks that simply postpone the financial burden.
Affordability criteria will be introduced to ensure that borrowers can repay their loans even if interest rates rise or their own financial circumstances change.
But innovative mortgage lender programs designed to help borrowers meet the criteria are not making homeownership more affordable.
These are merely temporary measures taken in the hope that circumstances will improve – which is great, unless that doesn’t happen.
If interest rates don’t fall, if house prices don’t rise again, if the pressure on household budgets doesn’t ease, there will be big problems in the future caused by the very same measures designed to alleviate them.
Smoke and mirrors
One such trick that is becoming increasingly popular is the long-term mortgage of 30 or even 40 years. The number of borrowers taking out mortgages for 35 years or longer has more than doubled in the last five years, and four times as many people will repay their loans in their 70s.
This type of mortgage may seem cheaper in the short term, but will result in tens of thousands of pounds in interest payments in the long term.
Renting: The new loan models have also become more important in the buy-to-let market in recent months, with some loans charging a fee of up to 7%.
However, borrowers who take out this mortgage simply to get a foot on the property ladder will no longer have any scope to extend the term if their situation worsens.
The new mortgage charter, which the industry launched last month to support borrowers, allows those struggling to switch to an interest-free mortgage for a short period of time.
In the short term, mortgage payments will become cheaper. However, the costs of the mortgage are even higher due to deferred payments and additional interest. Mortgages with high upfront fees appear to be the latest model in this direction.
A borrower opting for a Skipton loan at 3.35 per cent would pay £985.23 a month, assuming they had a £200,000 mortgage over 25 years.
In comparison, they would pay £1,287 a month if they took out Skipton’s conventional mortgage at 5.99 per cent with no fee.
If they were accepted for the best two-year fix on the market – currently 5.28 per cent with a £999 fee from Barclays – they would pay £1,202.04 a month, according to mortgage broker L&C.
The monthly cost may be cheaper, but over the two years the borrower with the lower Skipton rate would pay £1,350 more than the Barclays borrower.
Of course, it makes sense to find solutions to help households with temporary shortages. But my fear is when they become systemic.
I applaud Skipton for looking for new ways to get his troubled members out of a temporary bind. However, high-fee mortgages may not go the way of long-term mortgages and become a common tool to support borrowers.
Affordability tricks should only be used in emergencies. If such mortgages become widespread, they will be little more than a ticking time bomb.
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