What mortgage fees are there and how do they work?

Besides the mortgage deposit and monthly repayments, there are several fees you are most likely required to pay in order to complete your application.

There are the mortgage set-up and arrangement or booking fees. Sometimes there is even a mortgage account fee. You will also be required to pay for the valuation services, and for a telegraphic transfer, which helps complete the administration of a mortgage.

On top of this, depending on your circumstances you may need to pay a higher lending fee – sometimes applicable to those taking out a mortgage with an 80% or 90% Loan to Value ratio. Beyond the mortgage there are other fees you need to pay, including the Stamp Duty and buildings insurance, and potentially many more.

What mortgage fees are there?

There are several fees you need to pay in order to complete your mortgage application, usually you will be expected to pay:

• Mortgage arrangement fee (also known as mortgage booking fee)
• Valuation fee
• Legal fees
• Telegraphic transfer fee (also known as the funds transfer)
• Mortgage discharge fee (also known as deeds release fee or mortgage account fee)

And depending on your circumstances you could also pay these fees:

• Higher lending charge
• Mortgage set-up fee
• Early repayment fees

This list does not cover all of the potential home buying costs, such as Stamp Duty, surveyor’s fees, buildings insurance, home insurance, life insurance, repairs and maintenance, moving costs, running costs, council tax and the estate agent’s fees.

What is the mortgage set-up fee?

The mortgage set-up fee will not apply to every mortgage and every customer. It is similar to the booking fee (see below) but merely reserves the mortgage before you formally begin the application process. This fee is usually around £100 to £250, but you may not even be required to pay this.

What is the arrangement or booking fee?

The arrangement fee, also known as the booking fee, is usually one of the largest upfront mortgage fees you might be required to pay. It is simply an administrative fee for arranging your mortgage.

This can sometimes be as high as £2,000 or even more, but is often somewhere between £500 and £1,000. Each lender, and each type of mortgage will have a different price for their arrangement fee. Some lenders will even waive the fee completely as a special offer, but make sure you’re still getting good value on your mortgage’s interest rate.

You can sometimes even arrange to add the booking fee to your mortgage, but this is something you should avoid, as it will mean paying much more for it in interest.

What is a higher lending charge?

This is sometimes charged to customers who are borrowing at a very high LTV ratio, usually around the 90% mark. Some lenders will charge this if you can’t put up a big enough deposit.

This fee does not always apply and not every lender will insist on it, but it’s worth looking out for when comparing mortgage fees. If it is there, then it is usually around 1.5% of the mortgage offer.

What is a mortgage discharge fee?

The mortgage discharge fee, which is sometimes known as the account fee or a deeds release fee covers the administration of closing down your account once you have paid off the mortgage in full.

What is the surveying or valuation fee?

The valuation fee is carried out by the mortgage provider to assess whether the property is really worth the money you are asking to borrow. The valuation fee can be anywhere between £100 and £2,000 depending on the value of the property.

The outcome of this service is crucial – if the mortgage lender thinks the property is worth less than what you are offering the owner, then they will downgrade your mortgage.

Surveying fees are different, and relate to the building structure and condition. They help you to know whether or not the property is worth what the owner says it is, and if there could be any issues further down the line.

Surveying is recommended and for a cost of around £150 to £250 for the basic survey, to around £500 to £700 for a full structural survey, they can save you much more money later on.

What is the funds transfer or conveyancing fee?

The funds transfer fees are what you pay to a conveyancer (a solicitor specialising in the transfer of legal title of property) to help exchange the money from the mortgage provider. This can be as little as £50.

However, conveyancing fees can be much higher, and are covered below under ‘What are legal fees?’.

What are legal fees?

The conveyancer will do local searches to check there are no other plans around the property that could affect transferring the title to you. This aspect of the legal fees alone will cost around £300.

Their legal fees will cost up to around £1,500, but you may find that come only charge half of this. These legal fees need to be paid in order to complete the transfer of the mortgage to the seller.

What are early repayments or exit fees?

Almost all mortgages will allow you to make overpayments, up to a certain amount, usually up to 10% of the mortgage value per year. Doing so can save you hundreds, if not thousands of pounds in interest, every year.

However, each mortgage provider will have their own set of rules for making overpayments. If you pay too much, then you will be charged an early repayment fee. This is usually between 3% and 5% of the amount you overpaid.

There are also exit fees related to remortgaging. A remortgage will essentially pay off your mortgage and move your debt over to a new mortgage provider. However, you would have paid the old mortgage off early, and be subject to an exit penalty, which can cost you dearly.

This fee would still be the same as if you were making an early repayment, and therefore would be around 3% or 5%.

Comparing mortgages: fees vs rates

There are several fees associated with buying a house, especially just to get the mortgage application process completed. As a result it can be tempting to simply go for the first mortgage you find that offers to discount or refund many of the standard fees.

However, many of the mortgages with discounts and refunds on fee do so at the expense of not being as competitive with the market leading interest rates.

Mortgage interest rates are the most important factor to consider when comparing deals. Ultimately the interest rate will decide how much your monthly repayments will be over the next 20 years or more.

That means even if you save £1,000 or even £3,000 with mortgage fee discounts, make sure you won’t lose that money, and potentially much more than that, by not going with a deal with a cheaper interest rate.

Always compare the mortgage market’s interest rates, and do your calculations over a longer period of time, rather than just the first few years.

Read more…

• How to buy a house – To buy a house you need to set a budget, find a home you can afford, apply for a mortgage and transfer funds to the seller
• Mortgage interest rates – The interest rate is the cost of your mortgage, but what affects it?