In recent years, increasing fees and charges on mortgages have hit borrowers hard.
It is important to know what the extra costs are, and how they will affect you and your bank balance. First-time buyers can be at particular risk of being seduced by the headline interest rate on a mortgage deal, without taking into account those hidden charges which can bump up the true cost of a homeloan substantially.
Here is a list of the key fees to watch out for during the homebuying and mortgage arranging process:
Mortgage fees and charges:
- Booking fee: Also called a reservation or product fee. A booking fee is paid to reserve funds on a mortgage product that has limited funds available such as a fixed rate. Booking fees are often non-refundable, so if the mortgage applicant cancels the mortgage application before completion the fee will not be reimbursed.
- Arrangement fee: While some lenders charge an administration fee others may charge an arrangement fee. This fee is charged to cover administration and primarily reserving the funds for fixed rate or discounted rate mortgages. The arrangement fee can significantly change the competitiveness of the mortgage in question. For many people, deciding whether to go for a low fee and a higher rate, or a higher fee with a lower rate, will come down to their finances at the time they apply for the mortgage and whether they can afford to pay a larger fee. However, the amount you are borrowing can also determine the best deal for you.
- Early Repayment Charge (ERC): These are known as ERC s for short. If you are receiving a special interest rate there is normally a penalty to be paid if you redeem the mortgage before the end of the fixed or discounted period, the mortgage deal period.
- Redemption/exit fee: When you pay off your mortgage either to become mortgage free or to move to a different lender, most lenders charge a fee, often called a deeds release fee which can vary from £25 to over £100.
- Broker/intermediary fees: Borrowers who use mortgage brokers to find the most suitable mortgage loan on the market may face a broker fee. Many brokers get a commission from lenders (known as a procuration fee), and this can often offset the fee for broker services.
Fees relating to the purchase of property
- Valuation fee: The lender will want a formal valuation of the property. This is sensible as its not sound business practice to lend say £100k for a property that’s worth only £85k.
- Legal fees: Most people use a solicitor to do the legal work associated with buying a property and taking out a mortgage. Your solicitor will also charge you for any work you need to do on behalf of your lender in setting up the mortgage, but the cost should be included in the overall quote they give you. It’s always worth getting quotes from a few solicitors or conveyancing firms before you decide which one to use, as fees differ.
- Stamp Duty Land Tax (SDLT): Stamp Duty, or Stamp Duty Land Tax as it applies to the purchase of property, is payable by most homebuyers. For property worth less than £125k it’s 0%; 1% is charged for properties worth between 125k and £250k, 3% up to £500k, 4% for £500k to £999,999, 5% on properties sold for £1m to £1,999,999 and 7% on £2m+.
When to pay
Stamp Duty has to be paid to Her Majesty’s Revenue and Customs (HMRC) within 30 days of completion, although most solicitors will push you to pay it earlier, as soon as the purchase has gone through. Most people pay it via bank transfer, but you can pay online or using a credit card (be aware that there is another fee for paying by card!).
Some people choose to add the Stamp Duty to their mortgage. Be aware that, if you do this, you will be paying interest on the duty for years to come – and it may impact on the loan-to-value threshold of your mortgage. As a general rule it makes more sense not to add Stamp Duty to your mortgage balance if you can avoid it.
On the other hand, it can be perfectly sensible to add other fees, such as the booking or arrangement fee, for example, to the mortgage if you are given an option of doing so. That way you only pay the fee if the deal completes. Some lenders will try to charge you a non-refundable booking fee, which they retain even if your deal falls through. Adding smaller fees to the loan avoids this.