Understanding Mortgage Charges
Many people are unaware of the typical costs involved when taking out a mortgage and base their selection purely on the lowest mortgage rate. There are many other factors to consider when choosing a mortgage and the cheapest interest rate may not necessarily mean the best overall deal. There are various fees that can be incurred when setting up a new mortgage, we have listed below the most common mortgage charges that may apply –
A booking fee is a fee that is paid for applying for the mortgage. It is usually non-refundable and can typically range from £50 to £250. A booking fee (sometimes known as a product fee) is in principle, a fee for reserving the funds on a specific mortgage deal. The fee is paid when applying for the mortgage and cannot be added to the loan amount. Some mortgage products come without booking fees.
An arrangement fee can be charged in addition to a booking fee and can be paid upfront or added to the mortgage. Often, the higher the arrangement fee charged, the lower the interest rate offered by the mortgage lender. Fees can vary but an average is approximately £1,000. Although adding an arrangement fee to your mortgage can be an attractive option, it must be considered that interest will be charged on the additional amount for the duration of the mortgage. Your monthly mortgage payments will also be slightly higher. Your mortgage adviser can advise you on whether it is cost effective for you to pay a mortgage arrangement fee. However, as a general rule of thumb, the smaller the mortgage, the less advantageous it becomes to pay an arrangement fee.
Some mortgage brokers will charge a fee for their advice which should be clear and transparent from the outset. It can either be a fixed fee or a percentage of the loan amount, on average the fee is around £500. Alternatively the broker may receive commission from the lender. Lenders typically pay a procuration fee of 0.34% of the amount being borrowed (£350 per £100,000) for residential mortgages.
To ensure that a property is suitable security for a mortgage, the lender will instruct a surveyor and charge a fee for a mortgage valuation. The cost can range from £350 for a basic valuation up to a full structural survey which can cost approximately £1,500.
Some lenders will offer a free valuation for first-time buyers.
Generally, a basic mortgage valuation is usually suitable to identify if a property is suitable for mortgage purposes. It must be noted however, that this valuation is done only for the benefit of the mortgage lender and offers the mortgage borrower no protection. Should the property be listed, or impaired, a more in-depth valuation should be carried out by a RICS surveyor.
A valuation fee cannot be added to the loan and is paid either on application or at the time the valuation is carried out. This fee is usually non-refundable if the property purchase does not go ahead.
Some mortgage lenders will charge a valuation administration fee, a charge for dealing with the administration costs arising from processing the mortgage valuation. This is paid when you apply together with your valuation fee. A typical cost is approximately £75.
This fee covers the costs of setting up the mortgage, the administration that goes with it and eventually the closing down of the mortgage. You can sometimes choose to pay this upfront or defer the fee until your mortgage ends. Interest is not usually charged on this fee should you defer it. The typical cost is around £200 although some lenders do not charge at all. This fee can also be known as an exit fee or a closing down fee.
This fee is levied if you decide to take out a buildings insurance policy with another provider. It covers the time and work involved for the lender to look at your policy to ensure you have adequate cover. The fee is generally paid on completion and is around £25.
Sometimes known as a CHAPS fee, this is a small charge (typically £30) paid for your mortgage lender to transfer funds to your solicitor on completion.
Formerly known as a mortgage indemnity guarantee (MIG), this charge will only apply if the deposit is small and therefore the loan to value ratio is very high. This presents a greater risk to the lender so an insurance policy is taken out to cover the risk of default and the cost of the insurance is passed to the borrower. The charge is typically 1.5% of the loan amount. Very few lenders impose higher lending charges.
Early repayment charges are only applicable if you leave your mortgage early. They can however be significant, so it is important to know the cost of leaving your mortgage if you need to before taking the mortgage out.
This charge applies if you decide to repay some or all of the mortgage before the deal period ends. Quite often lenders will allow you to repay up to 10% of the loan amount per year without incurring a charge. Early repayment charges can vary between 1-5% of the amount repaid. Usually, the charges can be higher if you have fixed in for a longer period, although they can sometimes be tiered.
If you are concerned you may wish to move property, or your circumstances may change during your mortgage product deal, it is essential you discuss this with your mortgage adviser. There are mortgage products available with no early repayment charges. The rate of interest on these products may be slightly higher, but it could save a considerable amount in unnecessary early repayment charges.