Nice arrangement - for the lenders

Anger is mounting at the use by mortgage lenders of a series of fees, often called arrangement, completion or reservation fees, to rake in extra from customers while claiming to offer super-low mortgage rates.

The fees can run as high as £500 and are even added to the smallest mortgage. When challenged to explain why the fees are charged and how they are calculated, the answers from lenders are unclear.

Perhaps the most common reason given is the cost of administration - setting up the home loan, doing the paperwork - but this fails to explain why one mortgage lender should ask for an arrangement fee of £500, another £150, while some don't charge at all.

Fixed-rate mortgages tend to have higher fees, says a spokesman for the Halifax, Britain's biggest home loan lender. "That's down to the administration involved in securing that money from the money markets," he adds. Halifax's arrangement fees range from nothing to £499.

Northern Rock concedes that its arrangement fees "are higher than many of our competitors" - the vast majority of its fixed, discounted and capped loans carry a fee of £395 or in some cases £495. However, Northern Rock offers a "help-with-costs" option which provides mortgage customers with a payment of up to £1,000 subject to conditions.

Nationwide calls its fee a "reservation fee" - it is £150 and applies to all its fixed and tracker deals.

Some lenders calculate the fee based on their overall costs. For example, if they are marketing a mortgage product on a particularly low interest rate, a lender may charge a slightly higher fee in an attempt to plough some money back.

"Lenders' fees are good for lenders," says David Hollingworth of Bath-based mortgage brokers London & Country. "It is important not to get sucked into a mortgage based on a very low interest rate - people need to look at the fee as well. Some borrowers could actually be better-off on a higher rate."

Fees can also be a difficult issue for borrowers to stomach because the amount charged is not based on the size of the loan - it is a fixed cost rather than calculated as a percentage. While this makes sense in that whatever the amount borrowed the cost of administering it should stay the same, in effect it means those borrowing smaller amounts are subsidising those with larger loans.

So someone borrowing £50,000 and paying a £500 fee, for example, is handing over 1% of the total loan value while for a loan four times this size it's just 0.25%.

In addition, some lenders charge the fee up-front rather than on completion, and once it is paid they don't necessarily refund it if the borrower changes their mind or takes out a mortgage with another lender instead.

London & Country says it is crucial that borrowers - particularly those remortgaging - do their sums carefully based on all the costs involved.

"Just because a deal looks attractive at face value because the interest rate is low doesn't necessarily mean that it's the best deal," says David Hollingworth. "If the lender's fee is high, it could cancel out any gains made from a lower interest rate over the course of the loan. So borrowers need to weigh up what they will end up paying out.

"There are a number of costs to be factored in to any calculation such as legal costs and valuation," he adds. "It is also important to take account of any refunds and how this will affect the total, and to be aware of things like extended penalties which would influence the total cost of the mortgage over time."

Mr Hollingworth points out that even if two loans have more or less the same lender's fee, a difference in other costs or in interest rates can have a significant impact on the overall amount paid out.

Taking the remortgage of a £100,000 interest-only loan on a property valued at £150,000 and comparing all the costs shows very different results. The costs for a Yorkshire building society 3.65% tracker for two years include a £325 lender's fee, £225 for a valuation and £350 in legal costs. This puts the total fees payable at £900. The interest charged over the two years comes in at £7,300, bringing the total cost of the loan over that time to £8,200.

Meanwhile an Abbey National 3.85% tracker for two years has a lender's fee of £299 but it has no valuation charge and offers free legal work.

So when the two-year interest total of £7,700 is added to the fixed costs of £299, the amount paid out over the period of the deal is £7,999 - £201 lower than the Yorkshire's.