If you’re looking for a great mortgage deal, what are the costs and charges you should consider? There kind be a mind-boggling array of costs – here’s a guide to the main ones.
1. Product fee.
This can sometimes be called a ‘booking’ or ‘arrangement’ fee. It can be several hundred pounds (£500 is now considered quite low and £1,000 is not unusual).
Some product fees are a percentage of the loan, with a minimum amount. This can add up to quite a lot if you have a large mortgage.
The shorter the mortgage deal you opt for, the more expensive the product fee works out on a ‘per year’ basis.
Some fees are split in two; with an upfront and non refundable charge when you apply for the loan and a second fee paid when the mortgage has been granted.
SAVVY TIP: Some lenders will let you add the product fee to the mortgage. It will work out more expensive if you do this because you’ll have to pay interest on the fee amount. However, you can add it to your mortgage and pay it off quickly (as long as your mortgage lets you make overpayments) if you’re short of money when you move home. Some banks don’t charge these fees for existing bank account customers.
2. ‘Revert to’ interest rate
This is the rate you’ll pay once your mortgage deal runs out. It’s normally the lender’s standard variable rate but it may occasionally be something different. Be aware that bank and building society standard variable rates vary widely from lender to lender.
SAVVY TIP: Some lenders have much more competitive ‘revert to’ rates for people who took out a mortgage with them before the credit crunch. That can mean it’s better to stay on this rate once the deal runs out, rather than to try and remortgage.
3. Valuation fee
Most mortgage lenders will charge a valuation fee although with some products they will pay this fee up to a certain limit. Lenders sometimes market two very similar deals, one with a free valuation and legal fees which has a higher interest rate than the one where you have to pay for your own valuation and legal fees.
SAVVY TIP: Valuation fees are tiered and typically vary from around £200 (the minimum amount) to £750+ (for a property costing £1 million). However, the tiers and levels vary from lender to lender.
4. Early repayment charge
All fixed rate and many tracker deals include an early repayment charge. This is a fee you have to pay if you remortgage or pay off the loan before the end of the preferential deal.
SAVVY TIP: The early repayment charge can be a fixed amount (such as 3% of the loan throughout the term of the deal) or a decreasing amount, such as 5% in the first year, 4% in the second and 3% in the third year.
5. Penalty free overpayments
Most lenders will let you overpay a limited amount during a fixed or tracker deal without incurring a penalty. It may be a set figure (such as £500 a month) or a percentage of the outstanding mortgage amount (often 10% per year).
6. Higher lending charge
This is a fee that you as the borrower may have to pay if you’re taking out a high loan to value mortgage (typically 90% or more). Not all lenders impose them at the same loan to value limit and not all lenders charge the same amount.
SAVVY TIP: It doesn’t protect you in any way at all, but is designed to protect the lender’s interests. Even though the lending charge doesn’t normally apply unless you’re borrowing 90% or more, its cost is generally based on a percentage of the value of the property over 75%.
SavvyWoman email newsletters: If you found this information useful why not sign up now to receive free fortnightly email newsletters with money saving tips and help? You can sign up at the top of any page on the website and your details won’t be passed to any other company for marketing purposes.