Published: 17 October 2012 | Author: Bernard Clarke
In our response to claims about mortgage arrangement fees made in tonight’s BBC Watchdog programme, we argue that it is important to recognise the distinction between fees or charges relating to administrative costs, and other fees that form a core part of the pricing of the individual mortgage product on offer.
The latter fees - often called product fees - are sometimes calibrated against the interest rate payable. So lenders may offer a variety of different mortgages, some of which combine a higher rate with a lower fee, with others that have a lower rate and higher fee.
The benefit of offering some mortgages with fees and some without, and with fees at different levels, is that different customers can choose the combination that best suits their needs and preferences.
Various regulations exist to protect consumers, and ensure that they can compare different mortgages on price, even if their fees and charges differ.
One of these is the APR (annual percentage rate of charge), which takes account of not just the mortgage rate, but also any compulsory fees and charges associated with the mortgage. This must be clearly stated on advertising. The lower the APR, the lower the total cost of credit.
The other - and a very important document to the mortgage customer - is the key facts illustration (KFI), which is a personalised illustration spelling out all the costs and characteristics of a particular mortgage that a customer plans to apply for, before they submit a formal application.
As long as lenders comply with these rules that make all the costs transparent, consumers benefit. They get a choice of different mortgages, and can decide what combination of rate and fee they prefer. They get a highly detailed description of all the costs and characteristics of the mortgage they plan to apply for before they are committed to it.
The effect of Funding for Lending
Consumers are currently benefiting from historically low interest rates. Many existing mortgage holders, as well as those entering the market, are borrowing far more cheaply than earlier generations of borrowers.
However, in the wake of the financial crisis, regulators have adopted a far tighter approach to the risk management measures that they require lenders to adopt. One of the ways this feeds through to mortgages is that lenders have to hold more capital (to protect against potential losses) and liquidity (which provides the ability to replace quickly any funding that they lose, for example, if savers withdraw deposits from a bank). The riskier the lending they undertake, the more capital they have to hold.
These factors, as well as the underlying ability and cost of borrowing from savers and from the money markets to raise the money that enables them to lend, affect lenders' decisions about how much to lend, at what rates, and on what kind of loans.
The recently introduced funding for lending scheme (FLS) seeks to offset some of the increased constraints on lenders that now apply. While capital and liquidity requirements are designed to make the financial system safer overall, they also tend to pull against the wider economic benefit that would come from increased lending to enable households and businesses to contribute to economic recovery and growth.
The FLS is likely to help, although it is important to remember that the Bank of England has said that, without the scheme, lending would have been likely to contract (and may still do so). So reducing the extent of that anticipated reduction in lending, or achieving even modest growth in lending, may mean that the scheme is regarded as successful.
For lenders that use the scheme, and increase their lending as a result, the cost of borrowing for that new lending is likely to be relatively cheap. This will be one of the factors that influences the pricing that lenders offer to borrowers (through a combination of rates and fees). But it is not the only factor, and it does not change the fact that the overall way in which the mortgage market now operates (including the effects that regulation creates) is more risk-averse than in the past.
The more risk-averse environment, compared to the market before the financial crisis, is likely to mean that pricing will remain more "risk-based" than in the past, and expectations of what impact the FLS can achieve need to be seen realistically in the context of a market where demand, just as much as supply, remains relatively muted.