Costs associated with mortgages

With the excitement of buying a home, it is easy to get carried away when you’ve spotted a great rate. But be cautious, read the fine print and keep a close eye on the costs involved. A headline rate will not necessarily reflect the true cost to you.

Before signing on the dotted line, do your sums. Remember to consider all of the associated costs when buying a property, such as: advice, arrangement fees, legal costs and stamp duty. Together, these can amount to a fairly sizeable chunk and you may encounter some or all of these costs depending on the mortgage route you choose to take.

The last thing you need when signing up to the largest financial commitment you’re likely to make, is a costly surprise further down the line. Once we’ve sourced the most suitable mortgage for you, we can help with all the application paperwork and will give you a clear breakdown of costs.

Some lenders will dangle carrots, such as: free valuations, free legal costs or they may waive arrangement fees. If these incentives are important to you, we can factor them into our search to find your ideal mortgage partner.

Mortgage advice fee

High-street lenders will tend to only advise on their own mortgage deals and explain the options. However, there are many advantages to be gained by seeking specialist advice from a financial adviser. Financial advisers can trawl the market and often access the best deals too. The cost of this service is covered in various ways. An adviser may charge you a fee as a percentage of your mortgage value, or as a set fee amount. Alternatively, commission is paid by the lender directly to the mortgage adviser. Often, an adviser is paid by a combination of the two.

Lenders arrangement fee

Lenders will usually charge an administration fee to cover the cost of setting up your mortgage or to reserve a fixed rate or fixed term deal. The amount will vary between lenders. If money is tight, you may be able to add this fee to your mortgage. Do bear in mind, however, that you will be charged interest on this fee amount for the entire term of the loan.

Valuation fee

Lenders also need some degree of security when putting up large sums of money. To check the property you are buying is worth what you say it is, they will insist upon a basic independent valuation of the property. This is known as a mortgage valuation. Expect to pay for the cost of this valuation at the very beginning of the mortgage application process.

Higher lending charge

Rising house prices means that borrowers increasingly need to stretch their finances even more, often with little equity to put down as a deposit. If you wish to borrow more than 70% to 75% of the property value, the lender usually applies an additional charge above the advertised rate.

Early repayment charge

Mortgage lenders would ideally like you to stick with them for the long haul. If you manage to repay your mortgage early, or want to switch mortgages before the end of a special rate term, such as five year fixed rate, they will be losing out on forecast revenue. Consequently, they will apply an early repayment charge.

Early repayment charges are common with mortgages that offer a special rate or deal, such as fixed rates, capped rates or discounted rates. The early repayment charge usually applies during the set special rate or deal term. But be careful. Some lenders may lock you in, even after the deal has expired. The small print could tie you to a lenders standard variable rate for a specific period of time. A switch could result in a hefty early repayment charge.

Costs associated with the property

Properties are money pits. Before you even start throwing money into decorating and furnishings, and prior to getting the keys, there are some extra costs to budget for.

You’ll need to feel confident that the property you are buying hasn’t got any nasty surprises lurking in the brickwork, foundations or woodwork. The compulsory mortgage valuation report won’t go into details. It will simply tell the lender that if you default on payments, they will be able to get their money back. So, for peace of mind, it’s advisable to appoint a professionally qualified surveyor to conduct a more detailed survey. There are two types to choose from: a 'Homebuyers Report' or a 'Full Structural Survey'.

Homebuyers report

Costing from about £250, depending on the size of your property, a homebuyers report will give you a good indication of the state of the property and its level of repair and maintenance. It will encompass all visible parts of the property, such as the condition of the roof. The report will also advise whether the surveyor recommends any further specialist surveys. If you uncover major faults, the survey will enable you to negotiate with the seller for a reduction in price or for them to carry out the repairs before you move in.

Full structural survey

Costing between £300 and £1,000, depending on the size of the property, the Full Structural Survey is the most comprehensive and the most expensive. The surveyor will check the property thoroughly, looking at everything that is visible or easily accessible to examine the soundness of structure, its general condition and all major or minor faults.

If you would like this sort of detailed inspection, the surveyor carrying out the mortgage valuation for the lender can usually conduct a homebuyers report or full structural survey at the same time. Combining the two could save you money.

Legal costs

When buying or selling a property, you will need to appoint a solicitor to carry out all the legal work, known as conveyancing. Conveyancing is the legal process of transferring ownership of a property from the seller to the buyer.

Solicitors’ costs will usually be based on the price of the property you wish to buy or sell. Your money will pay for your solicitor to:

• Carry out a Land Registry search for English and Welsh buyers or a Registers of Scotland search and Register of Sasines search for Scottish buyers
• Carry out local land charges registry search
• Liase with the sellers solicitor
• Draw up contracts ready to exchange
• Ensure the mortgage deed is ready for signing on the completion date
• Arrange all the financial aspects of the transaction, such as having your mortgage deposit in place by the completion date and organising the payment of any Stamp Duty

Stamp duty

Stamp duty land tax is an unavoidable tax you must pay when purchasing property, where the purchase price is £125,000 or more. The rates charged increase at fixed property value points. For instance, you are buying a house with a purchase price of £200,000, so you fall into the lowest rate bracket.

There are some exceptions. If you are buying a property in a disadvantaged area, you will not pay any Stamp Duty on properties priced at £150,000 or less. If you are a first-time buyer you do not pay any stamp duty unless the property value exceeds £250,000.

Mandatory insurances

Many lenders will require you to take out building insurance as a condition of giving you a mortgage. Some lenders will also stipulate that this must be arranged through them. Being tied to a mortgage that stipulates this may not be in your interest. Although their mortgage may be very competitive their own insurance products may not when compared to the wider insurance market. Any savings you’re making could reduce significantly. So do your homework and shop around for the best ‘all-encompassing’ deal.