Yesterday, Virgin Money launched a 2-year fixed rate product at 5.09% up to 60% LTV, with a 1% fee, and brokers are expecting more low rate, high fee products to be launched in the months ahead as “lenders try to find innovative new ways to sell mortgages” in a weak market.
But they warned borrowers not to be “hypnotised” by headline rates. One broker went so far as to say “this could be the next big mis-selling scandal”.
Ranald Mitchell, director at Norwich-based Charwin Private Clients, said: “Product design is going to become a major factor in the mass mortgage reshuffle aiming to stimulate the market back into action as lenders try to find innovative new ways to sell mortgages. The shifting of interest to added fees is gaining momentum and will undoubtedly benefit some mortgage seekers, while not benefiting others. Buyer beware. In 2024, it will become trickier than ever to cut through the noise and make good decisions. Get advice.”
His views were shared by Jack Tutton, director at SJ Mortgages: “People are likely to be pulled into taking these lower rate products with higher fees unless they seek professional advice. When the arrangement fee is a percentage of the mortgage, you are looking at thousands of pounds and therefore ensuring that it’s worthwhile over the term of the product is imperative. However, It is interesting to see lenders thinking differently about the products that they offer and trying to assist people with keeping their mortgage payments lower.”
Simon Bridgland, director at Release Freedom, urged consumers to not fall foul of what he calls a cup and ball trick: “Lenders play a cup and ball trick on consumers when gaining direct business, as while a broker will look at the overall cost with clear eyes, the eyes of direct borrowers can often be looking in the wrong direction, namely at the rate rather than the overall cost. This cup and ball trick could claim more victims as fees rise and rates drop, at least for borrowers who go direct.”
Meanwhile, Michelle Lawson, director at Lawson Financial, warned of the danger of Best Buy tables “as the lowest rate does not always mean best rate for an individual. Best Buy Tables have always been around and I have never been a fan as they are arguably best for who?”.
Andrew Montlake, managing director at Coreco, agreed: “Many consumers have been hypnotised by a low headline rate only to find that the fee or associated conditions carry a nasty sting in the tail, especially when they only pay attention to one column of a “Best Buys” table. At a time when even mainstream residential lenders are showing a predilection for low rate, high fee products, this is where a professional mortgage adviser could save them hundreds if not thousands of pounds over the course of the loan. Percentage fees do have a place within product choice, however, and can work in some borrowers’ favour dependent on the loan amount, but the calculations need to be run and carefully compared. Over the coming weeks and months there will be an interesting battle between lenders who will utilise a whole array of different mortgage products to entice borrowers, and following a calm voice of advice through the cacophony of noise is going to be essential.”
Lewis Shaw, owner at Shaw Financial Services, said it’s never been more important to seek advice as fees rise: “There’s a considerable risk that worried customers could find themselves in thrall to headline rates and make a rash decision to jump in without understanding the consequences fully, specifically the fees. One of the reasons so many mortgage holders are in such a pickle, with almost 1.5 million due to renew their mortgages next year, is that they were hypnotised by ridiculously low rates during Covid-19. It’s never been more important to seek advice and consider all the options available rather than focus solely on rates.”
Jamie Alexander, mortgage director at Alexander Southwell Mortgage Services, said: “In light of recent trends, a surge of consumers are being drawn to products boasting lower rates, albeit accompanied by substantial fees. It’s imperative for potential buyers to understand that when arrangement fees are pegged as a percentage of the mortgage, the ensuing costs can easily run into the thousands.”
Justin Moy, managing director at EHF Mortgages, said being influenced by headline rates can be dangerous: “Choosing a mortgage product without advice, and being influenced by the headline rate, is financially dangerous and really not the way to be dealing with your most important debt.”
Scott Taylor-Barr, financial adviser at Barnsdale Financial Management, explained how, in some cases, people taking out deals with a low rate, in exchange for a high fee, could be left out of pocket after two years: “Whether a mortgage deal is good value, or appropriate for an individual client’s needs, is a balance between the interest rate and the set-up fees. Deals with a low rate, in exchange for a high fee, can work for people with a larger loan size, but the smaller the mortgage balance becomes, the less appropriate it will be. In the very worst scenarios, a deal like this one could mean someone owes more at the end of the 2-year fixed rate than when they started.”
Jamie Thompson, director at Jamie Thompson Mortgages, went one further: “I fear that, a few years from now, this could be the next big mis-selling scandal. There will absolutely be cases where this is the right thing to do for the customer, but any adviser recommending it will be writing War and Peace to demonstrate why it’s the right thing to do if they want to be sure their advice is watertight.”
