Mortgage charges explained

Your guide to understanding mortgage charges

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When you take out a mortgage, you may also have to pay an arrangement fee, valuation fee, booking charge and legal expenses, to name but a few.

Most people base their decision on the interest rate being charged, the number of years the rate is available and the type of mortgage it is.

But before you plunge ahead, you should stop and look at the fees.  While interest rates have tumbled over the past few years, mortgage-related fees have shot up and can now easily add another £2,000 onto the overall cost of your mortgage.

To make matters worse there’s a whole list of charges and different lenders can have different names for each. 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. A booking fee is usually around £99 but can be slightly higher while some lenders don’t charge it at all.  It won’t be refunded if you end up not taking the mortgage out.

Arrangement fee:

An arrangement fee is what you pay for the lender to set up your mortgage. Arrangement fees vary significantly and you could be charged up to £2,000, although the average is about £1,000.

You can usually choose between paying the arrangement fee upfront and adding it to the mortgage but it will ultimately cost more to do the latter as you will pay interest on it.

Some arrangement fees are charged as a percentage of the loan, rather than a flat fee.  Percentage fees are bad news for those taking out a large mortgage.

It’s really important not to overlook the arrangement fee when you’re comparing mortgages as it can have a significant impact on the total cost of the deal. In some cases it can be worth opting for product with a slightly higher interest rate in return for a lower fee, than going for the lowest rate if the arrangement fee is really high.

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 adequate security for the loan.  The cost of a valuation fee varies considerably and some mortgages even come with free valuations.

Legal fees:

Legal fees pay for a solicitor to do the legal paperwork for you – a process known as conveyancing – and are usually charged as a percentage of the mortgage price. If you are buying a home, the legal fees will include the cost of Stamp Duty and search fees. Mortgage lenders often have offers where they contribute to these fees or will pay the standard legal fees.

Higher lending charge (HLC):

Higher-lending charges were commonly charged on mortgages that cover a particularly high proportion of the purchase price (known as a loan to value – or LTV). The money from the HLC 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.

The HLC is usually refundable if you don’t go ahead with the mortgage and 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 possible to find one that doesn’t charge.  Our mortgage partner, London & Country is an independent mortgage broker that offers fee-free telephone advice whether you proceed with the application or you don’t. You can contact them on 0800 170 1943.

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

Own building insurance fee:  This is charged by your mortgage lender for checking you have taken out building insurance if you choose not to buy it from them. The fees are fairly small – around £25 to £50 each.

Fees charged after you have a mortgage

APR:

All mortgages have an APR (annual percentage rate). The APR is calculated to factor in the total interest cost over the 25-year term, plus any fees. 

In theory this should help you to compare deals. 

But mortgage APRs can be a bit confusing because they only give you the average cost if you were to keep your mortgage for the full 25 years, which is pretty unlikely.

You might, for example, have a two-year fixed rate mortgage at 1.65%, which then moves to the Standard Variable Rate (SVR) of 4.49%. This would give you an APR of 4.2% - but you’d never actually pay that rate.

So it’s always better to simply compare the initial rate you’ll pay and also check what the SVR will be when that rate comes to an end. 

Early repayment charges (ERC):

Most mortgage deals tend to have a 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 10 years. Whatever the term, if you come out of the deal before it ends, you will have to pay an Early Repayment Charge which, in most cases, is charged as a percentage of the loan. These can add up to thousands of pounds so make sure you think carefully about how long you tie in for in the first place.

Exit fee:

An exit fee is charged for closing your mortgage account – 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. Also known as a mortgage completion fee, deeds release fee or exit administration fee, the cost can now ring in at between £50 and £200. 

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