'Rip-off' mortgage fees penalising first-time buyers

Lending giants, such as Halifax and Alliance & Leicester, charge an average of £2,000 if people cannot afford a 10 per cent deposit.

The fee, known as a "higher lending charge", will be worth a staggering £220 million to lenders this year, the research claims.

Experts fear more than 100,000 borrowers will pay the charge this year, with many not realising that it can easily be avoided.

In a cruel blow, many borrowers do not have the money to pay the charge - and end up paying even more by adding it onto the mortgage.

Over the 25 years of a typical mortgage, the £2,000 fee would end up costing the borrower more than double this amount due to spiralling interest costs.

Experts slammed the higher lending charge as another way of banks and building societies squeezing even more money from customers.

Andrew Hagger, from the financial information firm Moneyfacts, said: "When you look at the amount that they charge, I think it is a way of boosting profits."

The higher lending charge is a fixed percentage of up to 8.95 per cent charged on a part of the loan.

Lenders insist the higher lending charge is a way of protecting themselves against the higher risk from borrowers with small deposits.

Critics argue that the risk is slim in a property market where prices have been rising for more than a decade.

It hits borrowers when they are least able to afford to fork out several thousands pounds.

The charge comes on top of the cost of paying stamp duty, legal costs, moving costs and other mortgage charges.

To add to their financial problems, interest rates have risen to a six-year high, making the new breed of 'super-size' mortgages even more expensive.

Economists agree that another rate rise on Thursday is a "cast iron certainty" as the Bank of England tries to control rampant inflation.

The biggest victims of the higher lending charges are young people because they are least likely to be able to afford a deposit.

But older people, who are also struggling to afford today's record property prices, are also falling into the trap.

The research, from Britain's biggest building society Nationwide, which scrapped the charge seven years ago, slammed it as a "money-spinner".

Matthew Carter, a Nationwide director, said: "With first-time buyers paying an average of more than £145,000 on their property, they could end up spending £5,500 on higher lending charges and stamp duty alone.

"These charges are unwelcome and avoidable."

The array of mortgage charges, including the higher lending charge, have come under fire for making the huge cost of buying a home even more expensive.

The average "arrangement" fee, a charge for simply taking out out a home loan, has nearly doubled in just three years.

In February 2004, the average fee on a fixed rate mortgage which lasted for between one and five years was £334.

Today, the average fee is £611, an increase of 83 per cent. Fees of £1,000 or more are not uncommon among the profit-hungry banks.

Experts warned people who are remortgaging to beware the rocketing charges, which can wipe out the money saved from the lower interest rate.

People with smaller mortgages of less than £150,000 have to be particularly careful of not paying over the odds for a mortgage.

With a larger mortgage, it is often worth forking out a high charge to take advantage of a particularly low interest rate which can save a fortune.

A Halifax spokesman insisted the "vast majority" of its first-time buyer customers do not pay the higher lending charge.

He added that the bank does not hide the charge, but is open and "very transparent" about it.