A mortgage is the biggest loan most of us will ever take out, so finding the right deal is crucially important.
However, while the interest rate on the loan is the aspect of the mortgage that is most likely to garner our attention – especially right now – there is a litany of other fees that borrowers need to be aware of and factor into their calculations when working out which mortgage deal is really the best for them.
The most obvious fee when comparing deals is the arrangement fee, though the actual name for this fee will change depending on the lender – they may call it a mortgage fee or product fee instead.
This is a one-off lump sum fee and can be pretty significant.
The typical mortgage fee will cost just under £1,000.
That’s a lot of money to stump up on top of the other assortment of moving costs, from Stamp Duty to the removals van.
That may be why many borrowers opt to add the arrangement fee to the mortgage balance, essentially paying it off in stages alongside the rest of the loan.
The trouble is that as you pay interest on it, the fee will end up costing you much, much more in the long run.
How to minimise the fee: Many mortgage lenders offer deals that come with no arrangement fees, though the interest rate will be higher.
It’s worth doing your sums to compare which is likely to cost less in the long term.
If you do go for a mortgage with an arrangement fee, make sure that you pay it upfront rather than adding it to the mortgage balance.
Some lenders call this a funds transfer fee, and it is a charge levied against you when the mortgage is transferred to you or your solicitor.
This tends to cost around £30-£50, and it is a pretty cheeky charge – there’s no reason a lender couldn’t cover the cost of the transfer from a portion of the interest you pay on the loan itself.
How to minimise the fee: Your only option is to try to find a lender that doesn’t charge the fee. But in the grand scheme of things, this should be pretty low down your priority list.
Depending on the lender, you may need to pay an account fee.
This is a charge to cover the cost of setting up and maintaining your mortgage account. Account fees can be significant – Lloyds charges as much as £295 depending on the mortgage product you take, for instance.
However, the good news is that if you do have to pay one, you most likely won’t be charged a redemption fee (more on that later).
How to minimise the fee: Not all lenders charge account fees, so you may be able to find an excellent fee-free deal.
While the fee is an irritation, it’s not worth going for a less competitive mortgage just for the sake of saving a couple of hundred pounds on an account fee – the less competitive deal will likely cost you more overall.
When you buy a property, you will need to pay a solicitor to carry out property searches and other conveyancing services on your behalf, and you will pay that solicitor directly.
A mortgage lender will also want to appoint a solicitor to act on its behalf, and while it may be that the lender is happy to use the same solicitor as you, it can insist on using a separate legal firm.
In these instances, you may need to pay a fee to your mortgage lender to cover these additional costs.
How to minimise the fee: A mortgage lender is more likely to use the same solicitor as you if you select a well-known firm with a good reputation. It may be worth asking your lender to recommend a solicitor rather than selecting one yourself.
When you apply for the loan, the lender will want to carry out a valuation of the property, to ensure that it is worth what you say it is.
Some lenders will waive this fee on certain mortgages, for example on remortgages, though with others the size of the fee you pay will depend on the value of the property.
With Lloyds, for example, there is a £225 valuation fee for properties worth less than £150,000, though this increases all the way up to £1,150 for properties worth between £1.9 million and £2 million.
Adding someone to the mortgage
If you need to add or remove someone from the mortgage, then it may come with an additional fee.
For example, Nationwide charges £125 for doing this, while Post Office charges £299.
How to minimise the fee: It may not be possible to avoid this fee if your circumstances change.
If you fall into arrears on your mortgage, then you will face additional charges, though the fees can vary significantly between different lenders.
Lloyds, for example, charges a £35 ‘arrears management fee’ every time it tries to contact you about late payments, with a further £100 fee if it instructs solicitors to collect arrears or seek possession.
Meanwhile, Nationwide charges £111 for an ‘arrears visit’ to discuss your options, with a £10 fee for any collections letters sent out.
How to minimise the fee: Pretty simple avoidance strategy here – make sure you pay your mortgage bill each month!
Early repayment charge
Sign up for a fixed-rate mortgage, and you enjoy the same repayments every month for a certain period.
But what if you want to pay the mortgage off during that fixed term, perhaps because you want to move or you fancy remortgaging to a different deal?
You may need to pay an early repayment charge (ERC), which is calculated as a percentage of the outstanding balance you are paying off.
For example, with a five-year fixed-rate mortgage you may need to pay an ERC of 5% in the first year, 4% in the second year, and so on until 1% in the fifth year.
You may also need to pay an ERC if you overpay by more than your allowance in a given year.
Most mortgages allow you to overpay by 10% a year but go above that and you’ll need to stump up an ERC.
How to minimise the fee: If you want to keep your options open for moving or remortgaging, then it makes sense to go for a shorter fixed-rate mortgage – that way you will only need to pay an ERC in the first two years for example rather than over five years or more.
Alternatively, look out for mortgages that do not charge any ERCs at all, such as a term tracker.
Some mortgage lenders will charge you a redemption fee, essentially a fee for closing your mortgage account. This is charged when you finish paying off the mortgage, or if you remortgage to a new deal.
This certainly isn’t the most sizeable fee associated with a mortgage, but it’s not exactly small change either. The Post Office, for example, says this fee will set you back up to £195.
How to minimise the fee: You can try to find a lender that doesn’t charge a redemption fee, but doing so may see you saddled with a less competitive mortgage rate, costing you more in the long run.