Common mortgage fees and why you have to pay them

So, you’ve just had your offer accepted and are about to finalise the finance for your purchase? You may be shocked to discover the many costs and fees associated with taking out a mortgage, and naturally have questions regarding these fees and their purposes.

As leading, independent mortgage advisors, we make it our mission to help you make sense of the mortgage market, and this extends beyond finding the best mortgage deal for you and your circumstances. Our jargon-free advice and support ensure you have a complete understanding of the entire process, whether you’re purchasing your very first home or looking to move onto new pastures by selling your current property.

In this blog post, we take a closer look at the most common mortgage fees and why you have to pay them to proceed with your chosen mortgage product.

The application fee

Often referred to as the ‘booking fee’, an application fee is generally paid when you complete your mortgage application. Its purpose is to book or reserve the necessary funds while your purchase is being processed.

This fee is generally paid upfront by the applicant. Selected lenders however allow you to add your application fee to your mortgage balance. If the purchase falls through, however, the booking or application fee is not refundable.

The arrangement fee

The arrangement or completion fee is the most common mortgage-related cost. Unlike the application fee, the arrangement fee can be refunded if your purchase falls through or you decide not to proceed for whatever reason. The arrangement fee is often the biggest fee you need to pay to secure your mortgage.

The HomeOwners Alliance explains why the arrangement fee should be a key consideration when selecting the mortgage product that is right for you:

“Lenders often use the arrangement fee to allow them to advertise a mortgage with a very low rate. The interest rate might be very attractive but the sting in the tail is an arrangement fee that can be more than £2,000. Some lenders allow you to add your arrangement fee to your loan. Just be aware that this will mean you owe more money overall increasing the interest you pay and your monthly repayments.”

The valuation fee

To determine whether the property you intend to purchase is suitable security for the loan you’re applying for, your prospective lender will commission a mortgage valuation to confirm its value. Whilst the scope of a mortgage valuation is limited, it will give you and your lender a basic idea of whether you’re paying too much for the property you wish to purchase with a mortgage.

It is important to note that a mortgage valuation is not a house survey. It will not provide the in-depth information you need to spot defects and other problems. If you’re looking for a more rigorous assessment of the property, an RICS Home Survey should be commissioned. 

RICS Home Surveys are tiered. The RICS Home Survey Level 1 (previously known as the ‘RICS Condition Report’) costs £300 to £900, whilst the RICS Home Survey Level 2 (or ‘HomeBuyer Report’) is priced between £400 and £1,000. The more comprehensive RICS Home Survey Level 3 (or ‘full structural survey’) costs up to £1,500, and should be commissioned if the property is more than 100 years old, has undergone major alteration, or is of an unusual or unconventional construction. 

Despite a mortgage valuation benefitting the lender, rather than the buyer, you are responsible for paying for it.

The valuation fee is usually paid upfront at the start of your mortgage application. The valuation fee is generally refundable if your application is declined or cancelled by the lender. If you decline or cancel, however, it is usually not refundable. Alongside your mortgage valuation fee, you may also have to pay a valuation administration fee.

Other fees to budget for

The list of mortgage costs and fees doesn’t end there. You’ll also need to budget for a CHAPS or telegraphic transfer fee, building insurance fee, mortgage account fee, and Stamp Duty Land Tax (SDLT) alongside your other property purchasing fees. 

When calculating the SDLT that is applicable to your purchase, it is important to acknowledge that different charging structures apply. If you are buying your first home, you’ll pay no Stamp Duty up to £425,000, and 5% SDLT from £425,001 to £625,000. For other home movers, Stamp Duty currently only applies to residential properties over £250,000, with the portion from £250,001 to 925,000 charged at 5% SDLT.

If you are purchasing a second property, either as a buy-to-let or additional residence, you’ll pay an extra 3% on top of these rates. You can find further information on the latest SDLT thresholds and rates here.

Legal fees also need to be budgeted for, with the cost of solicitors fees and disbursements (such as HM Land Registry fees and searches) paid upon completion.

Getting the advice and support you need to choose the right mortgage product for your requirements is crucial, and that’s where an independent mortgage broker comes in! When enlisting a broker, fees usually apply. Costs vary from broker to broker, with anything from a fixed fee of £395 to 1% of your mortgage amount to be anticipated. Broker fees also tend to be paid partly upfront with the remainder due when the mortgage offer is issued.

For further advice on the costs and fees associated with taking out a mortgage on your upcoming property purchase, find your local mortgage advisor today.

Image: wichayada suwanachun / Shutterstock.com