Don't be led up the garden path over home loan costs
Mortgages are easier to obtain now, but fees are rising too. Rob Griffin explains how to limit the damage
Saturday 07 July 2012
When it comes to mortgages, there's good news and bad. While the number of loans available has increased over the past year, so have the costs. A study by Moneyfacts.co.uk suggests fees levied on home buyers are up almost 70 per cent.
Average charges paid have shot up £607 in the last 12 months, from £904 to £1,511, according to data compiled to June. This remarkable increase has been blamed on a combination of factors relating to the global financial crisis.
"The cost of funding has risen sharply for lenders and so borrowers are finding upfront costs are becoming more expensive," says Rachel Springall of Moneyfacts. "Higher lending charges have also dissipated with higher fees counteracting them."
Even when lenders offer very attractive headline rates, the chances are they'll be coming up with increasingly innovative ways to claw money back so borrowers need to analyse exactly how the charges are likely to rack up over time.
This means there is now a vast array of solutions available in the marketplace, says David Hollingworth of the mortgage broker London & Country.
In some cases, borrowers can find deals with no arrangement fees and free legal work, albeit in exchange for a slightly higher interest rate.
"Choice is really good because it means you're not stuck to one type of product that may or may not fit your circumstances," he says. "However, it also means you've got to work through what can be quite a large number of different deals in an effort to work out which is best for you."
So what are all these costs and how can you cut them down to size?
This will probably be the most significant cost – and one that has been rising sharply. While it is still possible to find deals that only charge you around £500, it is not uncommon to be asked for five times that amount to get access to the best interest rates. you may find lenders waiving the arrangement fee, although this is likely to be in exchange for you paying a higher rate of interest over the mortgage term.
This will vary depending on the property's value but will usually be a few hundred pounds. If it is a remortgage, the lender may use a desktop valuation rather than instructing a visit to the property itself.
This is computerised, which is quicker and cheaper, but can result in a valuation that sometimes doesn't chime with the opinion of the owners. In these cases the decision can be appealed, but this will cost you more. Some remortgaging deals offer a free valuation.
Those purchasing properties, meanwhile, may be advised to upgrade from a basic valuation to a home buyers' report or even a full structural survey to get more information about a prospective house. These can easily cost as much as £500 and £750, respectively.
Early repayment charges
These are fees that apply when the mortgage needs to be repaid early – such as if the property is being sold or the borrower wants to switch to another lender – so they won't apply to everyone, although they're still worth taking into consideration, according to Mr Hollingworth.
"These can work out to be 3 to 5 per cent of the amount you are repaying, so you need to think up front about how long you're prepared to lock in for a deal and the likelihood that you will need to review the arrangement before the end of the term," he says.
Many mortgage products allow you to make overpayments each year – typically around 10 per cent of the total borrowed – without incurring any early repayment charges. If you choose to use this facility, make sure you keep tabs on it as you don't want to be hit with a penalty.
Higher lending fees
These are less of an issue now that relatively few companies are offering to lend large loan-to-value (LTV) rates, but can be a headache for those borrowing 95 or 100 per cent of a property's value. In some cases, it can cost an extra £1,000 – on top of the usual arrangement fees – for the privilege of a lender agreeing to a high LTV rate.
Lenders don't like seeing you go, so will effectively punish you for walking away at the end of a term by levying an exit fee. There was a storm around these a few years ago when borrowers found the rate charged for this had increased between them taking out the mortgage and the end of the term. That has been tackled but you can still expect to pay up to around £300 to say goodbye.
There are other assorted charges that may apply during the setting up process itself. For example, it is common for lenders to automatically charge you for a revaluation of your property unless you accept their mortgage offer within an agreed period of time.
Similarly, there will be other completion deadlines imposed which could result in a penalty of some description.
Other administration fees, meanwhile, include the telegraphic transfer of funds. This will vary between lenders but is usually around £35.
A raft of other fees may apply – depending on whether you need to make any changes to your mortgage agreements. For example, adding or removing names costs around £160 while you can expect to pay some £90 if you want further advances.
You will also get charged if you have difficulties keeping up with your mortgage payments and fall into arrears. If your lender needs to write to you, a management fee of around £35 could be charged. If it needs to instruct solicitors, this may cost more than £100. In the worst-case scenario, a decision to take a property back could result in you getting a £350 bill.
Comparing what's available
You have to do your homework, advises Nick Jukes at Hastings-based Phase Mortgage Solutions. "There seems to be no consistency to fees charged by lenders, with higher fees initially seeming to reflect the more preferential rates," he says. "Borrowers should take time in assessing the difference between the rates and level of fees as you should always work out the difference in the payments on the lower rates against the difference on the higher fees."
All aspects of a mortgage deal need to be taken into consideration, agrees Rachel Springall at Moneyfacts. "The only way borrowers can compare the cost is to ask their adviser for a 'true cost' projection; this will take into account all payments over the life of the mortgage," she says.
What's right for you will depend on your individual circumstances, according to David Hollingworth at London & Country.
The bigger the mortgage, the less the impact even a big flat fee will have because it's a smaller percentage of the mortgage amount. If you've got a smaller mortgage then the opposite applies and you should look around for deals where the fee structure is more moderate.
"To some people having a massive fee and a really low rate will be just what the doctor ordered," he says. "This is because they can save more back by having a low interest rate because they've got a bigger mortgage. They will end up saving the fee back and more over time."
You also need to factor in the length of the mortgage, points out Ray Boulger, senior technical manager at John Charcol. "Take the example of a two- and five-year fixed rate deal, both with arrangement fees of £1,000," he says. "The five-year deal will see an average cost of £200 a year, whereas over two years it would be £500."
Counting the cost: How two rival mortgage products measure up
We asked London & Country brokers to illustrate how various mortgage products can be compared, especially those in which there is a big difference in fees. For this, we looked at a couple of two-year fixed-rate deals based on a £150,000 remortgage over 25 years on a property worth £300,000.
Two-year fixed-rate mortgage at 2.64 per cent up to 60 per cent with a £1,999 fee. Monthly payment would be £683.55
Total monthly payments:£16,405.20
Legal work: Free
Total two-year cost: £18,631.20
Two-year fixed-rate mortgage at 3.49 per cent up to 60 per cent with no fee, free valuation and free legal work. Monthly payment would be £750.13
Total monthly payments: £18,003.12
Legal work: Free
Total two-year cost: £18,003.12
Despite carrying a higher interest rate, the deal that has been offered by NatWest works out to carry a lower total cost over the two-year period.
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
Q&A: What’s the best way to invest for our baby?
Crowd-to-let: How crowdfunding sites can give investors a slice of the property market for £500
Simon Read: 'Seven Families campaign offers an escape from financial and emotional distress'
After the election: What will Britain's financial future look like on 8 May?
General Election 2015: How you vote next week could affect your finances
- 2 The man who filmed the Freddie Gray video has been arrested at gunpoint
- 4 How the language you speak changes your view of the world
Over 50,000 families shipped out of London boroughs in the past three years due to welfare cuts and soaring rents
EU asylum policy is 'a direct threat to our civilisation', says Nigel Farage
The Rothschild Libel: Why has it taken 200 years for an anti-Semitic slur that emerged from the Battle of Waterloo to be dismissed?
General Election 2015: SNP and its activists 'openly racist' towards the English, Farage says
General Election 2015: UK will be 'run for the wealthy and powerful' if Tories retain power, Labour warns
Schools forced to act as 'miniature welfare states' with teachers buying underwear and even haircuts for poor pupils
iJobs Money & Business
£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...
£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...
£16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...
£18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...
Day In a Page
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park