The mortgage fees associated with taking out and paying off a mortgage have tripled in the last decade. Watch out for the hidden charges behind the cheap headline rates.
In the past, lenders would charge a fee to cover the costs they incurred administering the mortgage. But today, many lenders rely on fees to bring in extra revenue and so have increased the size of many of their fees.
Here is a rundown of the fees you will typically encounter when taking out a mortgage:
Also called the arrangement, reservation or booking fee, the product fee is the upfront price tag attached to a particular mortgage deal. A typical product fee is around £999, but it is becoming increasingly common to find product fees of £1,500 or more.
Product fees can often be added to the loan, and it is always wise to take this option even if you intend to pay it upfront on the day of completion. This is because some lenders may refuse to refund product fees if they reject your mortgage application, or if you change your mind about going ahead with the mortgage before completion.
The lender needs to assess that your property is worth at least the money it is lending you. So, it pays a surveyor to conduct a valuation, and covers its costs by charging you a fee. The size of the fee will depend on the price of the property, but even on the same property, there will be differences between the amount lenders charge.
Higher Lending Charge (HLC)
A Higher Lending Charge is imposed by some lenders on those who wish to borrow more than 75% of the property value. Most of these lenders only apply it to a mortgage with a loan-to-value (LTV - the percentage of the property price you wish to borrow) of 91% or more, so if you have a 10 per cent deposit, you should evade this charge.
The size of the HLC depends on the size of the loan. For example, if you have a 5% deposit, the typical higher lending charge on £100,000 mortgage is around £1,500, but on a £200,000 mortgage it would be around £3,000.
Mortgage lenders require you to take out buildings insurance so that, if your property burns down or is destroyed, their asset is protected. In the past, you were free to take out this insurance with any provider. Nowadays, some lenders want to sell you their own insurance and will penalise you with a £25 fee if you decide to go elsewhere.
The CHAPS (Clearing House Automated Payment System) fee, also known as a telegraphic transfer fee, is supposed to cover the administration costs of transferring the lender's money to your solicitor. The cost nowadays is likely to be only a few pounds, and while some lenders may charge more than this, others do not charge anything at all so it's worth checking your lender's policy.
Early Repayment Charge(ERC)
An Early Repayment Charge usually applies to fixed and discounted variable rate mortgages. Often, they are calculated as a percentage of the outstanding loan. You usually only have to pay an ERC if you want to pay off your loan during the discounted or fixed period of your mortgage deal. But it is still essential to look at how long an ERC will apply to the mortgage, and whether it decreases with time. Your circumstances could change, so the more flexibility you have, the better.
Most fixed deals nowadays do not come with any overhang. This means that ERCs do not apply once the rate converts to the SVR, so you are free to remortgage without paying a penalty. Watch out for deals that do have an overhang as they may cost you dearly in the long run.
An exit fee is a charge levied by the lender when you redeem your mortgage, either because you have finished paying it off or because you want to switch to another lender. The cost of an exit fee has more than quadrupled over the past decade.
The Financial Services Authority (FSA), which regulates the mortgage industry, recently forced lenders to offer refunds to past and existing customers whose original mortgage contract states that they will pay a smaller exit fee. This means that, no matter when you redeem your mortgage, you should not have to pay a higher exit fee than the current one stated on your contract.
If you have ever paid a higher exit fee than you expected to, you should contact that lender and ask it to refund you the difference between what you paid and the original sum you expected to pay.
When you take out a mortgage, the lender incurs legal costs, which are usually around £400. Most lenders will expect you to pay for these costs. The lender does not decide what the charge will be, it is set by the solicitor that handles the work on behalf of the lender.
If you are moving home, the lender usually engages the same solicitor that you are dealing with anyway. Your solicitor will ask you whether you are taking out a mortgage and most automatically add the lender's costs onto their fees before quoting you a figure.
This means that, no matter which lender you go for, your legal fees are unlikely to be any higher than the original quote from your solicitor.
Look out for 'free legals'. This type of incentive will cover the legal costs associated with the mortgage, but not with moving home, which is why they are often only offered with remortgage products.
Calculate your mortgage fees
If you know the interest rate of the mortgage you are considering, it is easy to figure what your mortgage repayments will be using our mortgage rate calculator.
Figuring out the true cost of the mortgage, however, is more complex. With some lenders charging over £4,000 in fees and others charging nothing at all, it is important to factor in the fees attached to a deal in order to compare it and assess its competitiveness.
How to calculate your mortgage costs
To do this, you will need to add the cost of all the fees involved to the cost of your repayments.
Download your mortgage fees calculator
Enter the cost of your repayments and the cost of the fees in the relevant boxes. This will allow you to see the true costs of each deal.
Calculate the true cost of a mortgage in four easy steps:
- Find out the rates and fees of the deal you are interested in. Remember to include product, valuation, CHAPs and exit fees, as well as higher lending charges and insurance penalties.
- Calculate the repayments per month using our range of free mortgage calculators.
- Multiply these repayments by the number of months you plan to stick to the deal (so 24 months for a two-year fixed rate).
- Add on the costs of the total fees. This will give a true comparison of the mortgage. If these steps seem daunting, speak to a mortgage broker who will work everything out for you.