Don’t forget the fees
Before rushing ahead with your mortgage application, stop and look at the fees. Fees have shot up. In fact, they’ve tripled over the last decade and can add £2,000 or more to the cost of your mortgage. Most lenders will have a range of different fees/rates combinations.
So you need to do your sums to take into account the full costs of buying a house and taking out a mortgage.
You can try to minimise these — and some lenders will give you help towards them — but you can’t magic them away. To make matters worse there are a host of fees given different names by different lenders, making them harder to compare.
If you can afford it, keep back some of the money from your deposit to cover these costs. It’s a good idea to add the fees to your mortgage loan if you can, so you don’t lose any money if the mortgage doesn’t go ahead.
Realistically, you might have to add them to your mortgage anyway if you can’t spare the upfront funds. But remember, you’ll be paying interest on the money for the length of the loan.
If you are allowed to make overpayments once the mortgage is set up, adding them on and then immediately paying them is the best route.
- Arrangement fee. This is the highest charge by far — apart from potentially stamp duty, depending on the price of your home — and has risen sharply in recent years. In some cases, they can be around £2,000.
Even worse are percentage fees, which traditionally were around 1.5%-2% of the loan, though fees are no longer charged in this way. In the worst cases, this is non-refundable if you pay upfront, even if the house purchase falls through, which is fairly common.
So you actually need to look at the arrangement fee as part of the price of a mortgage. For mortgages under £150,000, the fee is a disproportionately large cost. It’s often cheaper to go for a deal with a higher interest rate and lower fee.
Therefore, you always need to do a calculation incorporating both. Generally, the best way is to factor in the fee over the life of the fix or the discount (ie, two or five years).
Booking or reservation fee.
A few lenders also charge a separate reservation fee to secure a fixed-rate, tracker or discount deal. This costs about £100-£200, is always payable upfront and is non-refundable. Other lenders roll this charge into the arrangement fee, so don’t be surprised if it’s not mentioned.
Valuation fee. This covers the cost of an inspection of your new home.
This checks a) the property exists and b) estimates a value to reassure the lender that it can get a decent price if you miss payments and it repossesses and then sells your home to recover the debt.
The cost of the valuation depends on the property’s value, and your lender, but assume it’ll be about £250. This is not to be confused with a survey, which is optional but advisable (especially if you’re buying an old property). While valuation is for the lender’s benefit,
a survey is a more thorough check-up of the property for your benefit. It can spot things such as damp or structural problems and costs between £400-£700.
The seller needs to provide an Energy Performance Certificate — the band it is in (A–G) will go on the estate agent’s details.
Legal fees. Paid to your solicitor, this covers the cost of all the legal work associated with buying a home such as conveyancing and searches of local authority data to check for hidden nasties such as poor drainage. If you have to pay for your conveyancing, you’re looking at £500-£1,500.
Stamp duty. This goes to the Government and won’t be included even if your lender will cover legal fees. Occasionally lenders have short-term special offers when they’ll pay it — usually for first-time buyers — and some developers offer to pay it if you buy one of their new-build homes.
Stamp duty abolished for some first-time buyers. All first-time buyers in England and Northern Ireland are exempt from stamp duty on the first £300,000 of homes worth up to £500,000. If a first-time buyer purchases a property worth more than £500,000, the new relief will not apply, and they will have to pay stamp duty like everyone else. In Scotland, first- time buyers pay no Land and Buildings Transactions tax on up to £175,000.
The amount of stamp duty land tax — to give it its full name — you’ll pay depends on the price of the property. Sweeping changes to stamp duty were made back in 2014, getting rid of the unfair slab system where you’d pay a single rate on the ENTIRE property. Now you’ll only pay the rate of tax on the proportion of the property within each tax band. So, you could end up paying more than one rate of tax on different chunks.