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Mortgage Charges & Fees

How they work - What to look out for

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  • The Bad News - Fees and charges are where the mortgage lenders and banks make can make serious profits. It's also the area where we consumers can get taken advantage of

  • The Good News - But with a little but of education it's hard to overpay and far easier to get the right deal for a competitive price

So this page will teach you all that you need to know about mortgage fees and charges, what are reasonable, what are expensive, what needs to be paid, and what are outrageous.

Before you start why not download our free guide - How to get the right mortgage at the best price.

The cheap mortgage expensive fees trick

One of the first things to understand is these 2 points -

  1. Many mortgages are dressed up as great deals with the marketing usually highlighting a dazzlingly low interest rate
  2. However, lurking in the small print the lender will attempt to charge the highest fees possible. So what at first glance looks like a cheap deal can turn out to be expensive

You can often see these games being played in the Mortgage Best Buy tables so be on your guard and only use such tables as a rough guide.

Why the banks and lenders do this is simple - they're betting on is a basic lack of customer education into what they're actually buying. For example -

  • Many people for example are experts on the price of potatoes or a can of Coke because they buy them all the time - in effect they have plenty of experience
  • But for most people a mortgage is a one-off purchase
  • So without properly researching the product they might not be able to spot a bad deal, ie one that attempts to charge costly fees - because a lack of experience

See Secret 1 - Financial education - a little goes a long way - which is one of this site's 10 Secrets to Good Personal Finance.

The different mortgage fees & charges

  • The fees listed below are the main ones but it is important to note that many of them will not need to be paid
  • Instead they are listed here so you can understand what they are and why you might have to pay them.

Just how many fees are there?

A recent study showed the Halifax had something like 39 different mortgage fees that might be applicable to their customers. 'Might' means not all of them will be levied as a fair proportion are related to late or non-payments. It's probably wrong to single out The Halifax in this instance as I'm sure virtually every lender is similar.

The main charge - Arrangement fees (often called booking or initial fees)

Many lenders will call this fee by different names but however they spin it it's the initial fee for arranging and booking the mortgage loan.

Some lenders charge a flat fee, say £999 while others charge a percentage of the total value of the loan which might be 1.5% or £1,500 on a £100k mortgage.

However, some lenders can go as high as 2.5%. Be careful not to think in percentage terms as the difference between 1% and 1.5% doesn't seem that high but it can amount to several hundred pounds, if not more if the loan is large.

So how much for the average arrangement fee? In the region of £700 - £1,400

Important point re Fees and charges

Most lenders will give you the option of how to pay the fees. Either -

  • Up front in cash or
  • The amount can be added to the overall loan which means they'll get settled over the lifetime of the loan, normally 20-25 years.

So if the original fee was £1,999 and was added to the loan (assuming interest at 5.5%) a total interest bill of £2,748 would be charged plus of course the repayment of £1,999.

  • Agreeing to pay fees over such a long period of time is a great move for the bank
  • But not such a financially sound one for you

But I do admit that many people will struggle to pay an initial fee of say £1,500 and will be forced to add them to the loan.

However many lenders will allow you to pay a percentage, say 40% of the fees now with the rest being tacked on to your loan. And that seems a sensible balance if money is tight when you move.

Higher Lending Charge (HLC)

Whether you are charged this depends on how much you borrow in relation to the Loan-To-Value (LTV) of the property -

Many lenders will charge a Higher Lending Charge (HLC) on LTVs greater than 85% and the majority will definitely charge it on LTVs of 90%+.

All the lenders have their own policies on HLC so it's important to understand how they charge and how much they'll cost. Make sure you insist on a pounds and pence figure and not a percentage as that makes it hard to compare different mortgages.

Average fees are in the region of 1% - 1.5% of the total loan but these can vary enormously from lender to lender.

Early Repayment Charges (ERCs)

ERCs normally only apply to fixed and discounted mortgages.

They are charged if you want to cancel or remortgage during the discounted or fixed period. For example, if you take out a mortgage where the interest rate is fixed for the first 5 years but want to remortgage after year 3 you'll normally have to pay a charge.

It is therefore essential when researching whether a mortgage is right for you or not to see how ERCs are handled -

  • How much are they
  • Are they reduced over time so in year 2 they're cheaper than in year 1 etc?
  • Plus, are they cancelled after the fixed rate or discounted period has expired - If not that's underhand behaviour by the lender and means the mortgage is inherently inflexible. Basically these types of loans should be avoided

ERCs are normally charged as a percentage of the overall loan and not a fixed amount, so large mortgages can mean large ERCs.

Average fees are in the region of 1% - 4% of the total loan but again these can vary enormously so make sure you check.

Redemption fees (Exit fees)

Many lenders, but not all, also charge an exit fee when you want to change mortgage perhaps leaving Barclays and signing a Natwest deal. But the good news is that it's normally relatively low, in the region of £75 - £300. Say for example you've had your present mortgage for 9 years and want to move, your present lender might charge £100.

However, over the years the lenders have let their standards fall and raised these fees dramatically even when the initial contract stated that the fee was say £100.

This type of behaviour is a disgrace as the lender is theoretically breaking the contract which initially stated £100 but has suddenly increased. Personally I think the lenders use this trick because they know the majority of their customers either won't realise or won't complain.

But the vast majority who have complained have been reimbursed in full. More details on how to complain about mortgage exit fees on this page.

So how much for the average redemption fee? In the region of £100 - £450

Remortgage fee

If you want to move your mortgage from one lender to another you might be charged this fee. Not all lenders levy it so again make sure you understand the costs that are involved.

So how much to pay? In the region of £200 - £1,000

Regular overpayments and lump sum overpayment charges

  • Underpayment - If your monthly repayment is £600, an underpayment means you'd only pay say £300 for a few months
  • Overpayment - If your monthly repayment is £600 an overpayment would be say £900 a month

Some lenders charge for the above, some don't or at least they offer some leeway. For example, it's common to let you pay up to 10% more per month with no fee.

Always try to go for mortgage deals that don't have penalties for making overpayments or underpayments.

Mortgage broker fees

Some brokers will charge the client directly while others receive a commission directly from the lender.

If charged directly the fee should be in the region of 0.5%-0.8% of the total value of the loan but this can rise to 1.5% depending on the circumstances.

Is it better to pay the broker directly or for him to receive his fee from the lender? In most cases it's the latter but not always and this is why you need to take all fees and charges into consideration when comparing a number of different mortgage deals.

Flat rate versus percentage rate fees

Try not to take any notice of fees that are charged as a percentage as they won't mean as much as if converted into pounds and pence.

Also, flat rate (billed £1,000 for the advice) versus percentage fees (0.3% of the size of the deal) can sometimes be deceiving. For example -

  • A flat rate fee of £3,000 on a £100k mortgage is obviously 3% and therefore expensive
  • But if charged on a £500k mortgage it amounts to only 0.6% and far better value

The point being that you shouldn't always assume that expensive flat rate fees are just that, it all depends on how much the loan is for. If this is small then yes the fees won't be cheap but if the loan is large the fees might be good value.

Fees relating to the purchase of the property
Valuation fees

The lender will want a formal valuation of the property. This is sensible as it's not sound business practice to lend say £100k for a property that's worth only £85k.

So how much to pay? In the region of £200 - £500

Legal fees

These are not charged by the mortgage lender, rather by your own solicitor. Expect to pay in the region of £400 - £600 + VAT.

Some lenders as part of their overall mortgage deal will offer to pay all or part of your legal fees (up to a certain amount). Be careful though as this might be a marketing trick, ie they offer to pay but then try to claw back the money by levying higher fees on the loan.

Stamp Duty
Stamp duty is a government tax which cannot be ignored. It works on a sliding scale -
  • For property worth less than £125k it's 0%
  • 1% is charged for properties worth between £125k and £250k
  • 3% up to £500k, and
  • 4% for £500k+
The money is paid to your solicitor who in turn passes it on to the Stamp Office.
Insurance fees

LearnMoney Comment :

I said at the beginning of this article that it is unnecessary to become too worked up about mortgage fees and charges as many of them are compulsory. The trick is to find out what actually needs to be paid and then to find deals with fair prices.

Hopefully you've been educated as to what to expect. It will now be much harder for any broker or lender to overcharge you or sell you unwarranted and expensive insurance products.

If you want to know more of how I compare different mortgages and their fees, then read how to find the right mortgage at the best price.

FREE Report: How to get the right mortgage at the best price
It takes just 4 easy steps
How to make sure you don't overpay on charges
Learn to quickly sort through the market maze
How to get a flexible deal - why this is so important
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