Watchdog urged to act as fees for home loans go through the roof

THE sky-high fees imposed by mortgage lenders as a result of the credit crunch should be investigated by the Office of Fair Trading (OFT), leading politicians and consumer organisations demanded last night.

Critics of the banks believe they are exploiting the situation to charge borrowers as much as £4,000 in "arrangement fees" simply to set up a new mortgage.

The calls for an inquiry were led last night by Vince Cable, the Liberal Democrat shadow chancellor at Westminster. He said the OFT, the Government's consumer watchdog, should intervene to see if such high charges were justified.

He told Scotland on Sunday: "People having to remortgage at this time are in very great difficulties. There is a chronic shortage of credit and mortgage lenders are rationing it in different ways. Some are asking for larger deposits, some are increasing rates, some are keeping rates relatively low but imposing big arrangement fees."

Mortgage brokers say very few loans are now given without charging upfront fees starting at hundreds of pounds and in many cases running to thousands. Many customers have little option but to add the fees to their mortgages, meaning they effectively pay double the amount.

It is another blow for the 1.4 million mortgage holders now due to come off relatively cheap fixed loans over the next few weeks who now face a double whammy of both higher mortgage rates and expensive fees.

From tomorrow, the banking and mortgage giant HSBC will be offering to match the existing rates of borrowers coming off fixed two-year deals. But fees could rise as high as £4,099 if the borrower takes out the maximum £250,000 loan.

Borrowings of around £120,000 will attract fees of around £999, depending on what mortgage rate is chosen.

The West Bromwich Building Society is offering a two-year fixed rate at 5.19% for a £165,000 loan. That will cost £4,125 in fees. Lloyds TSB's two-year 5.58% fixed mortgage comes with a £ 1,995 fee, while Nationwide's two-year tracker at 0.53% above base rate charges £1,499. Two-year fixed rate deals being offered by Intelligent Finance, the online arm of the Bank of Scotland, will cost borrowers as much as £1,999 depending on the agreed interest rate.

Cable acknowledged that mortgage lenders were themselves struggling to raise the funds to lend because of the credit crunch. But he added that the competition authorities were being "very slow" in getting to grips with the rising charges.

"The OFT should look at this because it is potentially unfair charging," he said. "It is already looking at the issue of bank charges for account holders and the question is, should they take account of rising arrangement fees within this?"

Which? spokeswoman Kathy Neal said escalating arrangement fees were "a symptom of the state of the market and lenders use these as a sneaky way to make their products seem cheaper".

Julian King, who heads the National Homebuyers' organisation, accused banks and building societies of "cashing in" to maximise profits. "I do not think the scale of the charges is justifiable but I am certain the lenders will disagree. They are trying to sneak these charges in and there is a case for the financial authorities to have a look at this."

The Council of Mortgage Lenders, which on Friday appealed to the Bank of England to inject billions of pounds into the financial markets to provide funds for banks to borrow, says arrangement fees have always been a legitimate part of the business.

Any recent increase in their number and scale was a reflection of the present situation, in which lenders were having to ration mortgage products.

John Postlethwaite, a broker with Punter Southall, said high arrangement fees were now becoming the norm. "If we go back a year the cheaper products had some horrendous fees. But what has happened since Christmas is that higher fees have become the norm. Last year you could find fees of 2.5% but they were a rarity. Now they are becoming the norm."

High upfront fees benefit lenders in two ways. "Most people add them to their loan. You are adding to the lenders' profitability straight away and then you are paying interest on it. The reality is lenders can price a product however they want to. When you work out the total costs over the lifetime of a deal they often even out anyway."

Postlethwaite said early redemption charges had also been increasing but it was interesting that "exit" fees – paid to cover administration costs when a mortgage deal comes to an end – had been relatively static.

"They were subject to an OFT investigation a couple of years ago so they probably feel they can't do that," he added.

The OFT said it had not received any complaints about high arrangement fees but would consider requests to investigate the issue as part of its inquiry into bank charges.

'It's the financial sniffles rather than full-blown flu'

Jeremy Watson and Marc Horne

CREDIT crunch? What credit crunch? As Friday night revellers steered around him on Edinburgh's chic George Street, homeless and hungry Kevin, sitting on the pavement under a blanket, had his own unique take.

"Obviously I don't have to worry about a mortgage," he said. "But since all this stuff about the credit crunch my takings have definitely gone down. People don't seem to be giving as much."

Street 'collectors' aside, there were few other signs that Scots are being hit in the pocket by rising mortgage prices, the sliding value of investments and soaring bills for essentials such as food, power and petrol.

Although some are cutting back on holidays, clothes and cinema visits, the traditional end-of-the-working-week Friday night appeared to be business as usual.

In the upmarket Balmoral Bar, on Edinburgh's Princes Street, where beer costs £5 a pint, trainee surveyor Tony Small said: "If people do have any cares then I think they are drinking them away. I don't really see anyone cutting back. Maybe if I had kids and a big mortgage I might be thinking differently. In the meantime, cheers!"

A quick check of the city centres of Edinburgh and Glasgow revealed that most restaurants and bars were as packed as ever.

In Tonic, a cocktail bar on Edinburgh's North Castle Street, which relaunched last week despite the financial gloom, retail buyer Catriona McMahon and her mates were ordering a round of Cosmopolitans at £6 each.

"My mortgage went down a bit today so I'm celebrating," she said. "It is a worry that things might get a bit tighter financially over the next few months and I am cutting back a bit on things like clothes.

"The other night I got a DVD out instead of going to the cinema. But it will take a lot more than what has happened recently to make me give up my Friday night out."

If there is trouble ahead, then no one seems to have told the high-fliers of Glasgow either. In the world- famous Rogano Oyster Bar, where the great and the good have wined and dined for generations, there was not a seat to be had.

Champagne corks pop as the mellow sounds of The Good Life by Frank Sinatra echo around the ornate gold-leafed walls.

As glasses of Joseph Perrier Cuvée Royale were topped up, at £40 a bottle, there was little sense among revellers that their own dolce vita may be under threat.

Businessman Richard McKenzie is certainly in no mood to don sack cloth and ashes. He said: "On TV and in the papers, people are making dire noises about the hard times that are coming. But Glasgow is booming and the city is doing better than almost any other time I can remember.

"What people forget is there was a genuine deep recession and widespread unemployment in the Eighties and early Nineties.

"At the very worst I think we're looking at the economy growing slightly slower than before. It's a case of the financial sniffles rather than full-blown flu."