Whether you're buying, remortgaging or renting your property out, there are various fees and charges involved with taking out a mortgage. Don't forget, on top of all these fees there are also estate agent and solicitor fees, and neither come cheaply!
Check out this guide to all the major charges that will hit you when buying a property.
Stamp duty land tax is charged at different rates depending on how much you are paying for your new home.
Up to £125,000 you pay 0%
From £125,001 to £250,000 you pay 1%
From £250,001 to £500,000 you pay 3%
From £500,001 to £1m you pay 4%
More than £1m you pay 5%
More than £2m you pay 7%
In some areas of the UK, homebuyers might be exempt from stamp duty under the Disadvantaged Areas Relief scheme, but this is only if the property is valued below £150,000. Those properties with zero-carbon emissions can also receive relief, but the terms and conditions to qualify are very complicated.
These are fees paid upfront to the mortgage provider you are applying to and once their underwriter has approved your mortgage application. Be careful though as this is not always the case - some lenders charge you whether you are accepted or not.
It is essential to check what fees are involved and at which stages of the process you will be charged as it varies according to your lender.
Your lender may charge you an application fee simply for processing your mortgage application. It may be a flat fee or it may be a percentage of the mortgage.
These are charges for taking out a mortgage and should cover all the fees that some lenders price separately such as booking, application and completion fees. Essentially you are paying for them to check out how risky you are to lend money to (underwriting) and to handle the process of giving you a loan.
The cost can range from £499 to £2,000. Some lenders quote the amount as a percentage of the purchase price such as 1.5% or 2%, which will hit buyers of expensive houses hardest. Sometimes payment of the arrangement fee is split between paying some upfront and the rest on completion when the mortgage is taken out.
Often lenders charging low interest rates charge the highest fees. People with large mortgages tend to pay a higher fee to get a lower interest rate but this is not an option for a lot of buyers.
The arrangement fee is usually added to your mortgage, so you will end up paying interest on it for the length of your mortgage. It's far better to pay the arrangement fee separately as it will save you a lot of money in the long run.
Your mortgage fee is £1,250
Add this to your mortgage which charges a 3% interest rate.
You will end up paying an extra £528 over 25 years therefore the fee will cost £1,778.
However, there are risks. If your mortgage application falls through – or your house purchase doesn't go ahead - and you have already paid part of the arrangement fee, providers will not usually refund you.
Completion fees are usually charged on the day that the homebuyer moves into their new property, generally the fee is around £200 to £400. It is rare that a lender will charge an arrangement and completion fee, but it does and can happen.
Buyers who use a broker to find the best mortgage for them can face a broker fee, though there are some who don't charge a fee earning their money instead from commission. The amount of payment is decided by the broker – it's often a percentage of the amount you're borrowing - and there are some companies that charge for their time even if you don't take a mortgage arranged by them.
Mortgage indemnity insurance
Also known as a mortgage indemnity guarantee or higher lending charge, this is designed to protect mortgage lenders should you not manage to keep up with the mortgage payments and your home is repossessed. The lender will then sell your home but, if it goes for less than the loan, it can claim on the insurance. Say your former home sold for £90,000 and the mortgage was £100,000, the lender can claim £10,000 under the insurance policy.
The nasty catch with this insurance is that it doesn't cover you, the borrower, only the mortgage provider who can still chase you for the shortfall.
This type of insurance is only charged when the amount borrowed is close to the purchase price, say 95%, and since this type of mortgage is rare these days it's not as common as it used to be. Some lenders have dropped it entirely.
Valuation and survey fees
Mortgage lenders will demand that a homebuyer has a valuation survey carried out on the property they intend to buy. This is because the provider will want to know that the amount it is lending is not more than the percentage of the value of the property it is prepared to give you. For instance, if you are going for a 70% mortgage of £105,000 then your home will have to be valued at £150,000.
The fee is usually in the range of £100 to £300, although some providers will offer a free valuation as part of a deal.
The valuation survey is for the lender though you can ask to see it and may be sent a copy automatically. However, if you want a survey for yourself that shows you faults in the home you hope to buy there are two survey choices: a homebuyer's report and a full structural survey.
The homebuyer's report costs from £300-£500 and highlights the cost of any repairs. It is suitable for a property which is less than 100 years old. The full structural survey is more expensive and comprehensive. At around £500 to £700, it provides a much more detailed report on the property. This is recommended for properties which are over 100 years old.
This is the charge paid to the lender when you redeem your mortgage, generally because you have finished paying it off or you wish to switch to a better deal. The fee is typically around £275 but this can vary either way, with some not charging at all.
Early repayment fees
An Early Repayment Charge, (ERC), only applies to fixed, tracker or discounted variable-rate mortgages where the deal runs for a few years, such as two to five years. Do not confuse this with an exit fee. It is a charge for leaving the deal before it ends.
This fee is usually agreed when you take out your mortgage and based on a percentage of the amount you have borrowed.
Other mortgage fees and charges
This is a fee for anyone wanting to see their deeds, the legal documents which show the owners of a property - past and present – as well as the mortgage on a property, rights and obligations. Since 2000, it has been compulsory to register the title deed of any property being mortgaged, transferred or sold with the Land Registry.
This is a charge by your mortgage provider for providing a copy of documents related to your mortgage.
Extend/reduce mortgage term
Various mortgage providers charge a fee if you want to reduce or extend your mortgage. For example, if you wanted to extend your mortgage term from 25 to 30 years, the monthly payments will come down and your lender may check again to see if you're in financial difficulty. The charge is usually for administration purposes.
Mortgage product transfer fee
If you want to transfer to a different mortgage product from the same provider there is often a fee for taking it out.
Special clearance of a cheque
If a cheque needs to be cashed quicker than usual, then most banks will make a small charage, approximately £10-£15, to process the money in a shorter period of time.
The majority of mortgages have a condition stating that a property cannot be let or rented without written consent from the provider. Anytime you have to contact your mortgage provider about changes in circumstances or requests there will be a fee.
Title conversion freehold/commonhold/leasehold
If you wish to buy the land that your property stands on then you will need to contact the landlord and your mortgage provider. If you are a leaseholder, you may have a right to buy the freehold of your property – this is called enfranchisement. An example of commonhold ownership is where all the residents in a block of flats are joint owners on the land it sits on.
Transfer of equity charge
This is when someone is added or removed from a mortgage. This is one of the largest mortgage fees, varying between £100 and £300, because the lender has to re-evaluate the owner's financial situation which could result in a change of product.
Fees can make a huge difference to the cost of your mortgage. Check out this example.
X bank has a two year fixed rate mortgage of 3.5% with an arrangement fee of £2,000. On a £130,000 mortgage the monthly repayments are £651 making it £15,624 over 24 months and costing £17,624 in total with the fee.
Y bank's two year fix is 4.5% with fee of £500 making the £130,000 cost £17,852 in total. So even though the interest rate is higher the total cost is less.
- Before deciding on a mortgage, look at the fees as well as the interest rate
- You can't avoid most of the costs when buying a property
- The extra costs can run into thousands, so do shop around for the best buys
Make sure you compare fees from different providers; you need to consider more than just the interest rate