When we think about mortgage costs we tend to focus on monthly payments, but in fact there are a wide variety of other costs to consider as well. For this reason it is crucial to take account of all mortgage-related costs before calculating your house-buying or remortgaging budget.
Some of these additional costs are relatively straightforward, while others can be a little sneakier. We’ll walk you through ten of the most common additional costs below.
1. Mortgage application fees
Many of the best mortgage deals come with a sting in the tail – an application or product fee charged by the lender. This fee is typically around £600 but can be as much as £1,000 or more.
This type of fee was originally levied to cover the application costs of the mortgage. But nowadays, it is essentially a way for mortgage lenders to manipulate the Best Buy tables, which are primarily based on interest rates. Mortgages with lower interest rates don’t tend to yield great profits for lenders. By recouping some money with a higher application/product fee, a lender can afford to offer you a lower interest rate and therefore appear higher on the Best Buy lists.
2. Valuation fees
Mortgage valuations are designed to protect your lender – but you have to pay for them.
Mortgage lenders like to know the price you're paying for your home is a fair one. Otherwise, if you can't meet your mortgage payments and the lender has to repossess your home, the lender could be left with a shortfall.
Typically, a mortgage valuation fee will be at least a couple of hundred pounds (more for a more expensive home). If you’re remortgaging, many lenders will offer you a free valuation, so keep an eye out for this.
Another additional cost, though an optional one, is a Structural Survey or a (slightly cheaper) Homebuyers Report. These surveys are designed to protect you. They will provide you with additional assurance that the structure of the property you're buying is sound, and highlight any repairs necessary.
The cost varies according to the price of your property but it can usually be carried out by the same surveyor who carries out the valuation for the mortgage lender.
3. Solicitors' fees
This fee shouldn’t surprise anyone, but it should still be added to the list. Lawyers cost a lot of money, and you will need to retain one if you are buying a property (but not if you are remortgaging). Expect to pay around £1,000 for your legal bills in relation to buying a property.
Look out for firms which do not charge you if the property transaction falls through for any reason.
4. Higher Lending Charge (HLC)
The Higher Lending Charge is also known as the mortgage indemnity premium (MIP) or mortgage indemnity guarantee (MIG). It is essentially an insurance policy that protects your lender in the event you fail to keep up repayments and your home is re-possessed, but then sells for less than the value of the mortgage.
This is only a cost you will need to concern yourself with if you are putting down a relatively small deposit (typically less than 10%, although this can vary). Generally, the smaller your deposit, the bigger the HLC will be. However, as many lenders don't insist you pay this fee, our best advice is to avoid those who do.
5. Mortgage exit fees
You may be asked to pay an exit fee when you repay your mortgage – either because you’re remortgaging to another lender, or because you’ve come to the end of your mortgage term.
Some lenders now charge as much as £200-£300 to leave early, while others do not charge anything at all.
If you are asked to pay a fee, check your original mortgage contract. You should only have to pay the fee that was clearly stated in that contract.
6. Early Repayment Charges
Once a lender has secured your custom, they might then lock you in beyond the term of whatever special deal they've used to entice you through the door in the first place. You could get a reduced rate of interest for two years, for example, but subsequently find you're locked in for a further three years on their expensive standard variable rate. Normally these fees are stated as a percentage of your original or outstanding mortgage amount, often reducing by a percentage point each year.
Early Repayment Charges that apply during the period of a special deal (such as a two-year fixed rate) are commonplace and usually not a problem. Fees that apply after your special deal has expired are much more difficult to contend with, and mortgages that charge such fees should be avoided.
It also pays to watch out for cashback deals, as while they look good at the outset, lenders can claim part of this money back if you switch mortgages within a certain timescale.
7. Home and contents insurance
Mortgage lenders want to protect the money that is tied up in your home. So when you take out a mortgage, you will have to declare you have adequate buildings insurance. This will ensure your home will be rebuilt in the event of a fire or natural catastrophe, and that it remains structurally sound.
You are not obliged to take out contents insurance, but if you didn’t have it, the contents of your home would not be protected.
So we think taking out both buildings and contents insurance is a wise decision -- but doing it through your lender is not. Lenders are often in bed with insurance companies and they get big commissions on every customer they bring through the door.
Some lenders force you to pay a penalty if you do not take out buildings insurance with them. Weigh up the costs carefully. It could be worth paying this penalty to get cheaper or better-value insurance. So always shop around and see what’s out there before making your final decision.
8. Life assurance
Simply put, life assurance pays out a lump sum in the event of your death. While some mortgage providers will insist that you take out a life assurance policy to cover the value of your mortgage, others will not. So this may be an additional cost you have to factor into your calculations. Again, you can save a lot of money by shopping around for life insurance rather than buying from your mortgage provider.
9. Mortgage payment protection insurance
Mortgage payment protection insurance (MPPI) is a form of income protection insurance designed to help you pay your mortgage if you become unemployed, have an accident, or fall seriously ill. The more circumstances you wish to cover, the more expensive the monthly premiums. As with the other insurance products covered here, you will find that policies sold by lenders are usually the most expensive.
10. Stamp duty
Stamp duty is usually the biggest cost of all, and worse still, it’s totally unavoidable. Until September 2009, stamp duty is charged at 1% for properties valued at £175,001 to £250,000, 3% for £250,001 to £500,000 and 4% for £500,001 and above. Ludicrously, the percentage bands are charged on the full value of the property. So the amount of stamp duty you pay leaps dramatically for homes valued around the £175,000, £250,000 and £500,000 levels, compared to the cost on homes priced at just a penny less.
Back to our main mortgages page »