Mortgage fees explained

Key takeaways

• Most mortgage deals come with costs due before completion.

• Be sure to factor fees, as well as the rate, into the overall cost of any mortgage deal; lower headline rates can often come with high upfront fees, and costs can soon add up.

• Always pay mortgage arrangement fees upfront if you can, as if you get these get added to your home loan, you’ll pay interest on them; this will cost you more in the long run.

Here’s a rundown of what you need to know.

Fees charged when you apply for a mortgage

Booking fee

A booking fee is charged upfront and pays for ‘booking’ the loan while your application goes through. It can also be known as an ‘application’ or ‘reservation’ fee, and could be around £100-£300. It won’t usually be refunded if you end up not taking the mortgage out for any reason. This is the case even if your application is declined. Some lenders may deduct the booking fee from the arrangement fee (if both apply), but not all will.

Arrangement fee

Also known as a ‘mortgage fee’ or product fee,’ an arrangement fee is a cost you pay to your new lender for setting up your mortgage. Arrangement fees could be around £1,000, though they can vary significantly. It’s important not to overlook these fees when comparing mortgage deals, as they can have a big impact on the overall cost.

You can usually choose between paying the arrangement fee upfront and adding it to the mortgage. - It will cost more to add it to your mortgage as you will pay interest on it, so it makes sense to pay it upfront if you can. That way you can avoid having to pay interest on the fee for the entire mortgage term - helping you reduce the total cost.

While fixed fees are more common, some arrangement fees are charged as a percentage of the loan rather than a flat fee. Percentage fees rise with the size of the loan, so on a large mortgage, they can add up to several thousand pounds.

Note that sometimes it’s worth opting for a deal with a slightly higher mortgage rate if this means a lower arrangement fee.

Valuation fee

This pays for your lender’s survey on the property you want to buy. This is a basic survey which is only to check the property is worth the amount you want to borrow, and adequate security for the loan. The cost of a valuation fee varies considerably often at around £500, though could range to more than £1,000. Some mortgages even come with free valuations.

Legal fees

Legal fees pay for a solicitor to do the legal paperwork for you, which is a process known as conveyancing. This includes handling the searches, title transfers and drawing up contracts when buying a home. Usually, these fees are fixed fees, typically ranging from £800-£1,500, plus additional ‘disbursements’ for searches and checks. Some solicitors or conveyancers will calculate their fee as a percentage of the value of the property. Mortgage lenders often have offers where they contribute to these fees or will pay the standard legal fees (known as ‘free legals.’).

Higher lending charge

Higher-lending fees used to be charged on mortgages that covered a particularly high proportion of the purchase price, known as a loan to value (LTV). However, most lenders now absorb this cost themselves. Where a higher lending charge still applies, the money is often used by the lender to buy an insurance policy which protects itself (not you) should you default on the mortgage. Since the amount you have deposited is only small, this covers the lender if your property falls in value after you buy it, meaning the lender has to sell at a loss.

The higher-lending charge is usually refundable if you don’t go ahead with the mortgage. It’s generally expressed as a percentage of the loan.

Other fees

• Advice fee: You may have to pay a fee for mortgage advice if you use a financial advisor. But it’s also possible to find one that doesn’t charge. For example, our mortgage partner, London & Country, is an independent mortgage broker that offers fee-free telephone advice whether you proceed with the application or not. You can contact them on 0808 292 1091

• CHAPS fee: This covers the lender’s costs when sending the mortgage funds over to your solicitor

  via the ‘Clearing House Automated Payment System.’ It is usually non-refundable and typically costs between £25-£75.

• Own-building insurance fee: This is charged by your mortgage lender for checking you have taken out your own building insurance if you choose not to buy it from your lender. The fees are fairly small, around £25 to £50 each. Note that these are not charges that you are likely to face any more.

Do I need a survey?

While it’s not compulsory, it’s always wise to get a survey carried out before buying a property and taking out a mortgage. More than anything, a survey is an inspection of the house that will give you much-needed peace of mind.

In fact, the seller isn’t obliged to highlight issues with their house when putting it on the market. This means if you don’t arrange for a house survey, you could end up with unpleasant surprises once you move in. What’s more, if you find something wrong with your new home, in the long run, it may be too late to complain and seek compensation. By paying for a survey, you can get any structural issues, defects or hidden properties identified early on. That way, you can negotiate a fair price, and make an informed decision before committing to a mortgage.

Fees charged after you have a mortgage

APR

All mortgages come with an annual percentage rate (APR). The APR is calculated based on the total interest cost over the term (usually 25 years), plus any fees. In theory, this should help you to compare deals more easily.

However, mortgage APRs can be a bit confusing, as they only give you the average cost if you were to keep your mortgage for the full 25 years. Generally speaking, this is quite unlikely, as many borrowers remortgage, overpay or switch deals before 25 years – so the APR may not reflect the actual cost.

You might, for example, have a two-year fixed-rate mortgage at 1.65%, which then reverts to thestandard variable rate (SVR) of 4.49%. This might show you an APR of 4.2%, but in reality, you’d likely never pay that rate.

With this in mind, it’s usually more useful to compare the initial mortgage rate you’ll pay – and then to also check what the SVR will be once that period ends.

Early repayment charges (ERC)

Most mortgage deals tend to have a relatively short life. For instance, fixed-rate, discount, and tracker mortgages usually only run for between two and five years. Though, it is possible to find deals over ten years.

Whatever the term, if you come out of the deal before it ends, you will have to pay an early repayment charge (ERC). In most cases, this is charged as a percentage of the loan. ERCs typically range from 1% to 5% of the outstanding loan, depending on the deal. These charges can add up to thousands of pounds, so think carefully about how long you’re happy to tie in for before committing.

Late fee

If you don’t pay your monthly instalment on time, you’re likely to face a fine. This is known as a late fee, which is often a flat amount or a small percentage of the missed payment. Generally, you can expect to pay anything from 4% to 5%. Before charging you, most lenders will offer you a grace period in which you can make the payment without any additional costs. But bear in mind that any late repayment can still have a negative impact on your credit score.

Exit fee

An exit fee may be is charged for repaying your mortgage and closing your account. This could be, for example, if you switch to another lender or remortgage to another deal with the same lender. But it can also be charged when you just finish paying off your mortgage. This is also known as a mortgage completion fee, deeds release fee, or exit administration fee. To find out more, check your paperwork or speak to your lender.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Compare mortgage deals with MoneySuperMarket

Using a mortgage comparison tool can help you get a good idea of the kind of mortgage deals available. When you enter your information into MoneySuperMarket’s mortgage comparison tool, you’ll be able to compare example mortgage quotes from different providers. Just tell us a bit about yourself, your financial situation, and your plans. We’ll help you scour the market in search of the mortgage deal that is right for your pocket and requirements.