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Eight in 10 homeowners don't understand mortgage fees

Eight in 10 homeowners don't understand mortgage fees
Christina Hoghton
Written By:
Christina Hoghton
Posted:
14/06/2024
Updated:
14/06/2024

Do you know all the fees and costs you might need to pay when you take out a mortgage?

Buying a home is expensive. Not only do you need to save up a deposit, but there are also mortgage fees and costs charged by lenders and tax to pay that you may not know about.

In fact, 81% of homeowners admit they don’t understand mortgage fees, according to a new survey conducted by David Wilson Homes. And they agreed that this lack of understanding would influence their choice of mortgage lender and product.

The survey revealed that 85% of homeowners said they were unfamiliar with early repayment charges (ERCs), for example.

Terry Higgins, group managing director at TNHG, said: “Taking out a mortgage is a big financial commitment, and one of the biggest financial decisions you’ll take in your life. For many, this can feel overwhelming just working out where to start.

“If you are not aware of what fees you could be expected to pay then this could impact the size of your deposit. For example, the amount of stamp duty you will have to pay not only depends on your circumstances, but also where you are buying. This differs between England, Wales and Scotland.

“Legal fees and associated costs like local authority searches, called disbursements, form a large part of the initial fees that need to be paid. Yet, these are often overlooked or not fully understood.”

Cost breakdown

In response to the survey results, David Wilson Homes has published a guide to the different mortgage fees you may be expected to pay.

Below is a list of 13 mortgage and property fees arranged from the least to the most well-known among the survey respondents.

1. Higher lending charge
The survey found that 91% of respondents expressed unfamiliarity with higher lending charges, making it the least recognised mortgage fee among homeowners.

If you only have a small deposit, your mortgage provider may require you to pay a higher lending charge, which is often around 1.5% of the amount you borrow. It can use this to buy a Mortgage Indemnity Guarantee, an insurance policy that covers it should you fail to make your monthly repayments.

2. CHAPS fee
Despite it being a common practice of most banks to charge a CHAPS fee, a surprising 88% of prospective and current UK homeowners were unaware of it, potentially leaving many vulnerable to unexpected costs during the home-buying process.

A Clearing House Automated Payment System (CHAPS) fee pays for your mortgage money to be transferred from your provider to your solicitor. Typically, this fee amounts to around £25-30, but CHAPS charges vary between banks. It must be paid on completion and is usually taken off the balance your solicitor receives or added to the mortgage.

3. Mortgage account fee
Your mortgage provider may charge a mortgage account fee, typically between £100 and £300, to set up, maintain and close your mortgage account. This can be added to your mortgage on completion, or you can pay it upfront. Surprisingly, 85% of survey respondents were unaware of this fee.

If you pay a mortgage account fee, you should not have to pay any redemption administration fees in the future.

4. Early repayment charge
There are more fees to be aware of once your mortgage begins. If you decide to come out of a fixed, discounted, or tracker deal early, you may have to pay an ERC. This is added to the redemption figure provided by your existing mortgage provider. The amount you will be expected to pay will depend on your mortgage size, as it is a percentage-based fee.

You may also have to pay a redemption administration fee of between £100 and £300 to your existing mortgage provider for closing your mortgage account. However, 85% of survey respondents reported being unfamiliar with the costs of these fees.

5. Own building insurance fee
Some mortgage providers will arrange insurance for you, but you do have the option of finding your own deal, which is often cheaper. The survey found that almost four in five people were unfamiliar with the costs of own building insurance. If you go down this route, you may need to pay around £25, but this could still be the better option in the long run.

6. Conveyancing fees
Aside from your mortgage provider’s fees, you need to pay your solicitor or licenced conveyancer’s conveyancing charge (legal fees). Surprisingly, 78% of people were unfamiliar with the costs of these fees. Legal fees are typically around £800-1,500, but the final price will depend on the cost of the property.

7. Land Registry fee
A Land Registry fee transfers the title and deeds of the property to you. This fee changes depending on the property’s value, which can be confusing. Three-quarters of survey respondents reported being unfamiliar with this cost. Now, you can work out how much your Land Registry fee would cost using the Land Registry fee calculator.

8. Booking fee
When you apply for a mortgage, your provider may charge a booking fee. This is also called a reservation or application fee and costs between £100 and £300. However, 73% of people had no idea how much this fee would set them back.

It must be paid upfront and is non-refundable as it ‘reserves’ your mortgage funds until your application goes through. It does not, however, guarantee that you will receive a mortgage from your provider. Some lenders do not charge a booking fee; others include it in your arrangement fee, so you don’t have to pay for it separately.

9. Surveyor’s fee
Additionally, you will be responsible for compensating your surveyor for any surveys they conduct on your behalf. There are three distinct tiers of house surveys, each associated with varying price points. This variation in cost may account for the fact that 70% of survey respondents lack knowledge about these fees. Surveyor fees can cost anywhere between £400 and £1,500, depending on the survey type.

10. Arrangement fee
The arrangement fee, sometimes called a completion fee or product fee, is imposed by your mortgage provider to establish your mortgage. According to David Wilson Homes, 67% of individuals lack awareness of the expenses linked to arrangement fees. The average arrangement fee is £1,000, while others can be up to £2,500, yet some mortgage schemes have no fees. When deciding which mortgage deal to choose, you need to consider both the arrangement fee and the interest rate offered.

A mortgage broker will advise you on the most cost-effective combination of arrangement fee and interest rate, depending on the size of the mortgage you need. However big or small your arrangement fee, you can decide to pay it straight away or add it to your mortgage (this means you will have to pay interest on it for the life of the loan). If you decide not to take the mortgage or are declined, this money is usually refunded.

11. Valuation fee
The mortgage provider will want a surveyor to assess the property’s value, so they may charge a valuation fee. This can range from £50 to £1,500 (depending on the property’s value) but typically sits around £300. Surprisingly, 63% of people surveyed were unfamiliar with the costs of valuation fees.

You can also instruct your own surveyor to check the property’s condition, highlight any concerns and suggest any repairs, either through a Homebuyer or Full Structural Survey.

12. Mortgage broker fee
Some brokers are fee-free, and some require a broker fee. Nonetheless, 62% of individuals were unsure about the associated costs. On average, you can anticipate paying between £300 and £500 for your mortgage broker fee, depending on the value of your mortgage.

Brokers usually charge a fee for their service, which is either paid by you, the borrower or the lender. Additionally, brokers receive commission from the lender they place your mortgage with, although this does not affect the rate of interest you pay on your mortgage. Some mortgage brokers offer a free mortgage advice service and receive a commission from your chosen mortgage provider.

13. Stamp duty
Stamp duty is an additional expense for homes valued at over £250,000. However, first-time buyers are exempt from this duty on homes valued at less than £425,000. The research revealed that 54% of individuals lack awareness of the potential costs associated with these fees. Nevertheless, you can easily calculate your stamp duty using an online calculator, making the process quick and straightforward.

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