mortgage guide

Arranging a new mortgage or re-arranging an existing one can be an expensive business. There are a whole range of costs to be taken into account and these can sometimes mean that an otherwise attractive deal becomes much less competitive when the overall package is considered. So, what should you watch out for and how do you avoid some of these charges? Let's look at the various fees you can expect to encounter in more detail;

Lenders Arrangement Fees

The charging of arrangement fees by lenders has become increasingly common over recent years. Most lenders will now charge an arrangement fee, particularly if you are looking for a fixed or discounted mortgage. These can vary from a few hundred pounds up to a full 1% of the mortgage amount (occasionally even more). Some lenders will ask you to pay this fee up front when you submit the application, others will add the fee to the loan. You should always find out at the outset what terms apply to the arrangement fee and ask if the fee will be refunded if your application does not proceed for some reason (some lenders will wish to hold onto the arrangement fee even if they decline your application). If the fee is to be added to the mortgage then remember that you will be charged interest on this for the term of the mortgage - you may prefer to pay the fee on completion so ask if this is possible.

If the arrangement fee is particularly large then ask the lender to justify it. It may be that the interest rate is particularly competitive or that the redemption penalties are especially low. However, don't forget to take the fee into account when assessing the attractiveness of the deal.

Mortgage Indemnity Premiums

These are known under a variety of different terms such as Higher Lending Charge, Guarantee Premiums, Mortgage Indemnity Guarantees and a whole host of other names. Whatever the lender calls them they all have the same effect and that is to protect the lender if you are unable to pay the mortgage. The lender will use these premiums to purchase insurance that covers them in the event that they have to repossess the property and sell it. If they are in a loss making situation after the sale of the property then the Mortgage Indemnity Insurance will pay out and cover any loss they have made.

The important point to note here is that this insurance offers you, the purchaser, no protection at all - indeed you are still ultimately responsible for any loss that is incurred and in these circumstances you may even find that the insurance company that has provided the Guarantee will pursue you for the amount of the claim. Unfortunately, in most cases it is you, the borrower, who is required to pay this premium.

So, how much is this likely to cost and how can you avoid this charge? The cost of the premium will depend largely on the size of the mortgage requested in relation to the property value. On a 100% mortgage the charge will be particularly onerous and may amount to several thousand pounds. Conversely, if you are only looking to borrow, say 80%, of the property value then the charge may only be a couple of hundred pounds.

How do you avoid this charge altogether? Well, first these premiums normally only apply if you wish to borrow more than 75% of the property value so if you have a large deposit they shouldn't concern you. However, there are an increasing number of lenders who either pay this premium themselves or do not charge the premium at all ( you will find this particularly common if you need to borrow less than 90% of the value of the property) - look out for these lenders as the saving that can be made could significantly reduce your costs. Bear in mind, though, the lenders who do not charge for Mortgage Indemnity will have to recoup this money elsewhere so the interest rates on offer may not be so competitive.

If you do find yourself burdened with this charge you may be able to have the premium added to your mortgage. In this way it is not an additional burden on your capital although you will obviously be charged interest on the premium along with the rest of your mortgage.

One final point to remember - if you are re-mortgaging your property and previously paid an indemnity premium with your original lender they may be prepared to refund some of the premium charged, particularly in the early years of the mortgage. Whilst most lenders will not do this it is always worth asking the question of your existing lender as some will.

Brokers Fees

If you have decided to use a broker you will often find that the broker will be charging a fee for his work. This is fair enough but you should always make sure that you understand the terms of this arrangement and how much will be charged. Most reputable brokers will only charge a fee once your mortgage has completed and there is usually no charge if they are unable to arrange the mortgage or if the purchase does not proceed. Always be wary of paying fees up front and if you do so make sure that the fee is refundable if the broker is unable to arrange the deal.

One way to avoid or mitigate these broker fees is to allow the broker to arrange some form of insurance on your behalf. If you require life assurance then ask the broker to arrange a quotation for you. All brokers are now required by law to show you how much commission they will earn from the sale of such a policy and you can then ask the broker to offset this commission against any fee he may be charging. In many cases you will find that the commission more than covers the fee meaning that you pay nothing. Also ask the broker whether he will be receiving payment from the lender who is providing the mortgage. Many lenders now pay fees to brokers (these are called Procuration Fees) and you could ask the broker to offset this against your fee also. It is now a requirement under Financial Services Act Regulations that brokers disclose any fees they are receiving

If you are unable to reduce the fee in any of the ways described above then how much should you expect to pay? The answer to this question really depends, in many cases, on your own personal circumstances. If you have particular requirements or circumstances that make your application especially difficult to arrange then you can expect to pay more than if you have a simple, straightforward proposition. Brokers, in general terms, tend to charge up to 1% of the mortgage they arrange. However, remember that this is a very competitive market and most will be negotiable so you shouldn't simply accept the first figure quoted - some brokers will work for a couple of hundred pounds.

The other time when you may feel it is worth paying a large broker fee is if the broker has access to an exclusive product that you cannot obtain elsewhere. In this case, if the product is the best in the market, it may be worth paying a larger fee. However, take the fee into account when doing your sums.

Survey/Valuation Fees

Any mortgage lender will require a valuation of the property before they will make a mortgage offer. This is to protect them and to ensure that the property forms adequate security for their mortgage. The valuation fee will normally be paid by the borrower and will be required up front with the application. The fees themselves do not vary considerably between lenders but it is becoming increasingly common for lenders to offer to pay the valuation fee or to refund it to the borrower when the mortgage completes. This applies particularly with re-mortgages where the lender agrees to pick up all the costs.

One point to bear in mind here if you are purchasing a property is that the surveyor can usually carry out a more detailed inspection of the property for your own purposes at the same time as he carries out the lenders valuation - this can save you money overall.