Three ways mortgage lenders make you pay more than you should

Posted 24 June 2016 by Nick Parkhouse

Watch out for the way mortgage lenders are working to avoid passing on the full benefit of the record-low Bank of England base rate...

Since the base rate fell to its record low of 0.5% in 2009, lenders have been forced to resort to a range of ways to make money from your mortgage.

A recent case involving the West Bromwich Building Society increasing its rate on some tracker mortgages has highlighted the lengths that mortgage companies have gone to in order to make borrowers pay as much as they can.

While the mutual lender lost that court battle, there are other ways that lenders have tried to increase profits on mortgages.

Making it tough for borrowers to switch to cheaper deals

Over the last few years, thousands of borrowers who have come to the end of their fixed or discounted rate have been told by their borrowers that they can't switch to a cheaper deal - even if it would cost less.

The absurd situation has arisen because many people no longer fit their lender's affordability requirements, even if they have been maintaining their mortgage at a higher rate.

The Financial Ombudsman has dealt with many cases where borrowers have been refused cheaper deals because the lender says they can't afford the repayments - even if it will actually put them in a better financial situation.

High 'standard variable rates'

The standard variable rate (SVR) is a rate that lenders charge to borrowers who are not on any special fixed, discounted or tracker rate. Many lenders whose deals have expired are on their lender's SVR.

When the base rate was around 4-5%, the SVR charged by lenders was generally slightly higher than the Bank of England rate. Since the base rate has fallen, the gap between SVRs and the base rate has grown.

For example, Santander now charges a standard variable rate of 4.74% - more than nine times the base rate. Had the same measure applied before the global financial crisis, Santander's SVR would have been over 45%.

Some lenders have even higher SVRs, while the Daily Telegraph reports that “plenty of lenders charge between 4% and 5%” - up to ten times the base rate.

Charging higher fees

Ten years ago, if you wanted a fixed or discounted rate from a lender you would have paid around £500 as an arrangement fee.

As mortgage rates have fallen, booking or arrangement fees have risen sharply. Many of the leading fixed-rate products on the market now routinely charge £1,499 or even £1,999 as an arrangement fee - meaning lenders are profiting from these increased charges.

It is important that you compare the total cost of any deal, taking into account both the interest rate and the charges. Mortgage expert Mark Harris says: "Lenders may offer cheap headline rates to attract borrowers but these often come with a hefty fee, so look at the overall cost."

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