Yet another massive rip-off!

Mortgage lenders have started fleecing borrowers by charging non-refundable booking fees nearing £1,000. Here's what to watch out for - and how to get your money back!

Since the credit crunch began in summer 2007, UK mortgage lending has collapsed.

Indeed, gross mortgage lending in the first nine months of this year was just £104 billion, versus £207 billion for the same period in 2008. In other words, mortgage lending so far this year is roughly half that seen in the first nine months of 2008. Thus, although mortgage lending picked up this spring, this year is set to produce the lowest level of lending since the year 2000.

Lower lending is bad for banks

This plunge in lending creates a big headache for leading banks and building societies. Lenders grew fat on the rich profits banked during the credit and house-price boom of 1995 to 2007. Now it's much harder to make big bucks, because the economy is in the doldrums and bad debts are rising. These days, once-bloated mortgage departments are a lot quieter than they once were.

However, mortgage lenders have moved to boost their profits by increasing their interest margins. Although the base rate has fallen from 5% a year ago to just 0.5% today, mortgage rates haven't come down anything like as much. Indeed, the handsome margins over base rate that banks currently levy are the highest I've seen in more than 22 years in financial services.

Fat fees for home loans

When you take out a mortgage, it's important to look beyond the headline interest rate, as there are lots of extra fees to pay. For example, you may have to stump up:

• an application, booking or reservation fee;
• a lending charge (HLC) or mortgage indemnity premium (MIP) if you borrow more than three-quarters (75%) of the property price;
• a valuation or survey fee; and
• when you pay off the mortgage or move to another lender, an discharge fee, known as a mortgage exit arrangement fee (MEAF).

You should also watch out for Early Repayment Charges (ERCs) which you will have to pay if you decide to switch to a new deal before your short-term fixed rate, discount or tracker deal period has ended. The exception to this rule is lifetime trackers, where ERCs often don't apply.

The bad news is that, as well as increasing their interest margins, lenders have upped these various fees associated with home loans. In particular, booking and arrangement fees have gone up massively in recent years. As I warned in Low Rates Mean High Fees, mortgage arrangement fees almost doubled between 2005 and 2007 -- and they have continued to soar ever since.

No mortgage, but thanks for your grand

Today, it's not unusual for attractive mortgage rates to come with application fees of up to £999 on top. The big problem here is that, in many cases, these booking fees are non-refundable. So, borrowers who apply for a loan only to be rejected could find themselves up to a thousand pounds out of pocket, as well as out of a mortgage.

Indeed, according to research from mortgage-software designer Evaluate Technologies, 19 different mortgage lenders charge non-refundable booking fees of between £100 and £999. Around one in five mortgage lenders fall into this category. Therefore, being turned down for a loan after paying a hefty booking fee could be hitting hundreds -- even thousands -- of borrowers every month.

Here's our Hall of Shame showing 15 lenders which charge non-refundable booking fees:

As you can see, our list includes some of the UK's biggest banks, such as HSBC and Abbey. However, I'm terribly disappointed to see 11 building societies in this list. When traditional, long-established societies start unfairly treating their customers, it looks bad for the whole building-society movement.

Of course, lenders are right to impose fees to cover their processing costs and to reserve an interest rate for a prospective customer. Nevertheless, in some cases, borrowers are being turned down after the most cursory examination of their finances, such as a simple credit check. Given that this takes minutes, rather than hours, and costs very little, it's clear that lenders are over-charging many, many customers.

Time for the FSA to act

Of course, under the Unfair Terms in Consumer Contracts Regulations, imposing unfair or punitive fees on consumers is forbidden. What's more, the Financial Services Authority (FSA) requires financial firms to 'treat customers fairly' (what's known as the 'TCF Principle').

It seems obvious to me that charging someone hundreds of pounds only to reject their mortgage application at the first hurdle is patently unfair. What's more, it angers mortgage brokers and gives the whole industry a bad name.

My advice to customers in this situation is to make a formal, written complaint to the mortgage lender. If it refuses to listen to your argument, then follow its complaints procedure and then ask for a 'deadlock letter'. Once you have this, you can escalate your complaint to the Financial Ombudsman Service (FOS).

Although it may take the FOS six months to review your case, I suspect that it will rule in favour of the consumer in the majority of these cases. After all, I can't see a lender successfully arguing that it is fair to charge £999 to spend five minutes rejecting a loan application!

Lastly, mortgage lenders dramatically increased their mortgage exit arrangement fees during the housing boom. In some cases, exit fees were increased fivefold, putting borrowers at a major disadvantage. Fortunately, the FSA stepped in and ordered lenders to stick to their original fees during the life of a contract -- and to reimburse borrowers who had been overcharged.

Likewise, it's time for the FSA to intervene to stamp out the disreputable practices surrounding unfair and unjustifiable non-refundable booking fees for mortgages. A small admin fee is fine, but too many lenders are taking borrowers for a ride!

Get help from lovemoney.com

If you need advice on home loans, we can help.

First, go for this goal: Pay off your mortgage early

Next, watch this video: Navigate the mortgage maze

Finally, wander over to Q&A to ask other lovemoney.com members for their hints and tips on getting rid of their mortgage burden.

More: Find a low-cost mortgage | Great news for homebuyers | Why first-time buyers should hold fire

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At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 4045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article. 

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term will revert to the lender's standard variable rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.