How Much Does a Mortgage Cost?

The mortgage market is very competitive and many of the better mortgage quotes are sold as 'loss leaders' and without the applied charges and fees would result in the lenders making a loss. It is with this in mind that lenders attempt to 'lock' borrowers into the mortgage for at least as long as the special introductory rate applies. Whilst the rates may look very attractive it's important to understand the other costs that are involved with a mortgage.

Arrangement And Booking Fees

A booking fee or commitment fee is usually applied to special rate mortgages, like limited availability fixed rate mortgages for example and is at the discretion of the lender. The fee is applied to reserve the funds required to complete the mortgage about to be applied for. Booking fees are normally non-refundable, should you fail to complete the mortgage application it is likely the fee will not be reimbursed.

Arrangement fees work slightly differently and are charged upon successful application for your chosen mortgage. An arrangement fee is more common with fixed rate or discount mortgages but not uncommon with all mortgage applications. The fee can be anything from a hundred pounds to 1% of the mortgage amount but can usually be added to the mortgage.

Early Repayment Charge

An early repayment charge or redemption penalty safeguards the lender against the introductory rate that was offered with the mortgage, for example if your enter into a five year fixed rate mortgage you will likely be liable to pay a early repayment charge if you decide to pay the mortgage off or remortgage within the first five years. The penalty can ever exceed the incentivised period, for example a five year fixed rate mortgage may have an early repayment charge for the first seven years, this is referred to as 'overhang'.

Mortgage products are available with 'No Overhang' meaning the ERC will not apply once the special rate period is over, when you revert to the lenders standard variable rate the mortgage can be paid off without penalty. This usually means lenders cannot be as competitive with regards to specials introductory rates as they have no guarantee the borrower with stay with them. No Overhang mortgages are most beneficial for borrowers who will look to remortgage every few years to guarantee the best rates.

Valuation Fees

The lender will insist on an up to date valuation of the property, it's not uncommon for the lender to charge an administration fee as part of the valuation fee to cover arrangement costs for the valuation. It's important to remember that the valuation is solely for the benefit of the lender and will not represent a detailed inspection of the property. It's recommended that you also obtain a structural survey as they are far more detailed but will be more expensive.

Higher Lending Charge

A higher lending charge or mortgage indemnity charge as it is sometimes referred to as is a form of insurance for the lender against the loan amount. Should you require to borrow an amount which exceeds the lenders lending limit, usually 75% of the properties value you may be required to pay a higher lending charge. These charges are usually ~7.5% of the outstanding amount, for example a mortgage of £77,500 on a purchase price or property valuation of £90,000 would leave £10,000 exceeding the 75% lending limit, applying the 7.5% HLC would mean a charge of £750. It is important to remember that this charge in no way represents an insurance to yourself but to the lender.

Legal Fees

Both the mortgage applicant and mortgage lender require a solicitor or licensed conveyancer to conduct the transaction of buying or remortgaging a property. The solicitor or licensed conveyancer will be responsible for registering with the land registry, amending title deeds and surveying the property against factors such as subsidence or long term planning.

Insurance

It is essential that your new property be adequately insured throughout the term of the mortgage, lenders will insist on buildings insurance and may even require contents insurance too, as damage to carpets or white goods can devalue the property. Most lenders will offer or recommend a policy but should you already have insurance in place there is usually a fee to ensure the policy is suitable for the lenders requirements.

Another form of insurance is Mortgage Payment Protection, designed to protect you against unemployment, redundancy or long term sickness. This is however not compulsory.

Other Charges

There are several other charges that may apply to your mortgage, mainly in the form of charges, for example late payment charges, going into arrears with the lender or removing the lenders name from the property deeds once the mortgage has completed. The lender will provide a full breakdown of charges in the form of a terms and conditions of the mortgage before the mortgage is accepted.

Regulation Of Mortgage Sales

The Financial Services Authority (FSA) regulates the sales of mortgages through the UK financial services industry. For more information see FSA & Mortgages