You may well be surprised if you apply for a UK mortgage of £120,000 to find that the mortgage loan you actually service is considerably higher than the amount you thought you were borrowing. This is because the associated costs of obtaining a mortgage are often added to the loan, meaning you end up paying interest on them. Always make sure that you understand all the additional fees which may be applied to your mortgage, and whenever possible try to arrange the payment up front rather than have it tacked onto your loan.
Some of the costs and fees which you will be asked to pay are avoidable, whilst others are a given. The addition of fees emphasises the necessity of potential homeowners being financially prepared to take on a mortgage.
1. The first cost which is now required of all buyers is the deposit. The days of the 100% mortgage have gone, and although there is the odd mortgage provider offering 95% mortgages you should appreciate that the costs will be higher if you only offer a meagre deposit. The average deposit is now £34,000, making it extremely difficult for first time buyers to step onto the property ladder unless they have parental help.
2. The infamous MIG, the mortgage indemnity guarantee, has come under criticism from the Council of Mortgage Lenders as mortgage providers failed to make this often compulsory insurance policy transparent to buyers. Generally it is applied to mortgages which have a loan to value of more than 75%, thus borrowers with a deposit of less than 25% need to pay it.
The policy is an insurance which the borrower pays to insure the lender against default and is of no utter benefit to the borrower. Some lenders have ceased the practice of charging it, so first time buyers with a low deposit would be advised to shop around for a lender who does not impose a MIG. If it is necessary to pay it then pay it upfront rather than having it added to the loan.
3. Application fees which mortgage companies apply are standard but can vary hugely in amounts. Beware of low interest loans charging high application fees which can in general range from approximately £500 to £3000.
4. House buyers will be required to take out building insurance but are not obliged to take it from the lender. It pays to shop around to find your own separate policy. A saving can often be made if you take building and contents insurance together. Don’t let a lender pressure you into taking their policy unless it really does represent the best deal you can find.
5. Exit fees are applied across the board to borrowers who change mortgage lenders during the term of the mortgage and average £200.
6. Fees to secure fixed interest rates for a set period of time can appear costly but are often worth paying to secure a low rate. When comparison shopping for low fixed rates look beyond the rate offered for the first two years or longer, and see how the providers variable rate stacks up against the competition.
As a current example both the Principality Building Society and Ing Direct are offering 2 year fixed rates of 2.79%. However the variable rate which would apply after the fixed rate period differs with the Principality variable rate standing at 4.95% and Ing’s at 3.5%. Ing charges a fee of £945 whilst the Principality charges £1499. The Ing offer is only available though to those with a loan to value of 60% whilst the Principality allows 75%.
7. Early redemption fees are standard when a borrower makes a change within the period set for the fixed rate or resultant tie in years. If you take a low fixed rate which then applies the variable rate for a set period afterwards, you lose the benefit if you switch, so be prepared to stay with the same product for the full term specified.
8. Life insurance is required by some lenders and again they will try to sell you their own product. However it is not always a necessity so unless you want it look for a mortgage provider who does not insist on it.
These are the key fees which you will find applied to your mortgage making it far more expensive than simply the amount you wish to borrow. There are other associated costs connected to the actual purchase of the property to consider as well. It is thus advisable to have a flush fund of several thousand pounds to deal with these fees rather than have them attached to your mortgage loan, where the lender will happily charge you additional interest.