True Cost Of Buying A Home
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Buying a home often comes with a heavy price tag. Mortgage lenders seem to like slapping on fees left, right and centre. Don't be fooled into thinking the mortgage which charges the lowest interest rate is always the cheapest deal because extra charges can really put the true cost through the roof.
What's really sneaky about this is what I like to call the Best Buy Fix. Most mortgage best buy tables are based on interest rates so it follows the lender charging the most competitive rate will zoom right to the top. But this excludes fees which can turn a seemingly low-cost deal into a rip-off.
Worse still, there's no standard terminology for mortgage fees. With so much jargon flying about it's often difficult to tell exactly what you're paying for. So here's a rundown of every mortgage-related fee you're ever likely to encounter:
Product Fee
This fee covers the lender's costs for arranging your mortgage. Typically you'll pay around £500 but some deals could set you back by £1,000 or more. Given that this is a hefty charge you'll usually be given the option to add it to your mortgage loan. But that means you'll have to pay interest on it as well.
That said, it makes sense to add the fee to your loan to start with even if you intend to pay it upfront when you complete. Why? Because some lenders will insist on charging the product fee even if they turn you down or the sale doesn't go through. That way you'll avoid paying a fee for a mortgage you don't actually ever have.
Also known as: arrangement fee, application fee, booking fee, reservation fee
Higher Lending Charge (HLC)
The HLC usually strikes when you want you want to borrow more than 90% of property's value and it can equal around 1.6% of your mortgage loan. The HLC supposedly compensates for the added risk the lender is taking by advancing a loan to a borrower with a small deposit. The fee may be used to purchase an insurance policy which protects the lender from financial loss if you default on your repayments.
But it's worth knowing many lenders don't apply an HLC if you put down a deposit of less than 5%. Although this seems contradictory, it can actually work to your advantage to pay a smaller deposit to side step the fee. Have a look at Buy Your First Home For Less to find out how.
Also known as: mortgage indemnity guarantee, mortgage indemnity premium
Insurance Penalty
You'll need to buy buildings insurance when you purchase a home. Until you have repaid your mortgage lender needs to know that the building itself is covered against damage.
Although you're free to take out a policy with any company you choose, you could actually be penalised if you don't buy the cover provided by your lender. This could cost you an extra £25.
Money Transfer Fee
For the simple task of transferring your money from your lender to your solicitor, you could be charged anything up to £35. Not surprisingly, the actual cost to your lender is far less.
Also known as: telegraphic transfer, CHAPS fee
Early Redemption Charge (ERC)
This substantial charge usually applies to both fixed rate mortgages and discount mortgages, and will kick in if you want to redeem your loan or remortgage early. The ERC usually applies for the same period as your fixed rate/discounted deal.
It often reduces gradually. So, for example, over a five-year deal the charge could be 5% of your outstanding loan in year one, reducing by 1% each year to 1% in year five.
Be particularly wary of mortgages where the ERC extends beyond the length of the fixed rate/discounted period. It will then apply even if you have already moved onto the higher standard variable rate (SVR) and you want to remortgage to a more competitive deal.
Also known as: Redemption penalty
Mortgage Exit Administration Fee (MEAF)
You may have to pay this charge for the privilege of paying off your mortgage or switching to a new lender. Theoretically it covers the cost of legal, staff and administration costs such as changing the registration of the property at the Land Registry.
The cost of the MEAF has soared over the last decade often climbing to as much as £300. In January the Financial Services Authority (FSA) ruled the rise in the MEAF was unfair, leading many lenders to partially refund the cost to borrowers. Some have abolished the fee entirely.
Don't pay an excessively high MEAF. It should never be more than the rate stated in your contract.
Also known as: sealing fee, deed release fee, final administration fee, discharge fee, final redemption fee
Valuation Fee
Your lender will instruct a surveyor to value your property to ensure it's worth the amount they are prepared to advance. The fee you pay will depend on the value of the property and the lender you choose. There's no standard fee but if you borrow say £100,000, you can expect to pay between £135 and £475 *.
The fee will only provide a very basic valuation. If you want anything more in depth such as a homebuyers report or a full structural survey, be prepared to fork out even more.
There's no doubt buying a home can be an expensive business. True, not all lenders will charge all these fees, but if you do come across them in your mortgage contract it's important to understand the financial commitment you're taking on.
*Source: Research carried out by Your Mortgage, December 2007.
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