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Mortgages are an essential solution for those who do not have enough cash to buy their dream home, that covers most of us these days with house prices hitting increasignly higher and higher levels.
Making a mortgage affordable is the key concern for First Time Buyers and remortgagees alike. As you shop around for mortgages in the market, you will find products that offer deal based on the mortgage amount as a percentage rate of the property purchase price, these vary but 95%, 90% and 40% of the property's purchase price are the common benchmarks that you will encounter. So if taking a 95% mortgage it may seem that you need to arrange for only 5% of the property's price in cash, sadly not....
A common oversight by buyers is the associated costs of securing a mortgage and completion of the property purchase process. Let's look at these charges and fees in detail.
Before securing a mortgage, you will have to pay several charges to your lender, these are normally referred to as 'fees'.
Almost all lenders charge an arrangement fee for providing a mortgage. Before selecting a mortgage, you should check the arrangement fee charged by the lender.
Some lenders will charge very low interest rates to make the deal look attractive. However, they will charge a high arrangement fee, which can sometimes go up to £2,000. If you want a low interest rate, you should be prepared to pay a minimum of £1,000 as arrangement fees. A survey by Which? in 2014 revealed that mortgage arrangement fees in the UK almost doubled in the previous 5 years. In 2014, the average arrangement fee was £1,588 as opposed to £878 in 2009, arrangements fees have continued to grow in 2019
Many homebuyers want to know whether they should go for low interest rates with a high arrangement fee or they should go for high interest rates with a low arrangement fee. The answer is if the loan is large, it is better to go for a low interest rate even if the arrangement fee is high. But if the loan amount is small, a higher interest rate and a lower arrangement fee turn out to be a better option.
Example 1: HSBC offers a 2-year fixed mortgage rate of 1.49 percent, which is the best deal in the market. However, it is charging a fee of £1,999. Let's compare this with a deal from Norwich & Peterborough Building, which has a higher interest rate of 1.89 percent, but the arrangement fee in this deal is only £195. If you take a loan of £100,000 the second deal may turn out to be cheaper even though it has a higher interest rate in comparison to the first.
Lenders may ask you for an upfront payment of arrangement fees, or they may ask the amount to be added to the mortgage. Note that if the arrangement fee is added to the mortgage amount, you will have to pay interest on the amount for the entire term of the mortgage. So it is advisable to clear off the arrangement fee as early as possible.
Some lenders even charge more than one arrangement fee. The survey by Which? shows lenders charge 40 different types of fees with different names such as product fee, application fee, administration fee, lenders' fee, money transfer fee, etc. Sometimes a lender may package the arrangement fee as a booking fee. For example, in the HSBC example above, the amount of £1,999 is termed as a booking fee.
Did you know, lenders can seize the property if a borrower fails to make the repayment? For this reason, lenders perform an independent valuation of the property to determine the property's actual value. With an independent valuation, they want to be sure of getting a reasonable amount from the property if you default on the repayments. However, the lender's valuation may be different from the price you are paying for the property. Valuation fees can be anywhere between £300 and £400.
Example 2: Coventry Building Society has different mortgage valuation fees for different property prices. Depending on the purchase price, the valuation fee ranges from £100 to £1,305. Note, the highest fee of £1,305 is for a property worth £2,000,000, which is way above the average home price in the UK.
A property is a huge investment, and you want to make sure you are making the correct decision. You may find a property visually attractive, but it may have some defects that may not be visible to you. An independent survey can be of great help as it can identify any defects in the property, and also provide an accurate valuation. This way you can be sure that you are buying a property with no defects and that you are paying the correct price. Note this survey is optional and is different from the valuation done by the lender.
Depending on your requirement, there are three types of house surveys in the UK.
Whilst a survey can provide you a reassurance on the state of the property, sometimes it can also be helpful in renegotiation of costs. Let's say if a survey shows it will cost you £5,000 to undertake repairs, you can ask the seller to give you a discount of £5,000 on the purchase price.
It is advisable to perform a survey at the last stage of the deal because it can be frustrating if the deal doesn't materialize. Typically, you should conduct a survey after getting the mortgage offer and before signing any contracts or documents for buying the property. You can hire either an independent surveyor or check with your lender if they can arrange for one.
Costs will depend on the type of survey. A condition report will cost between £150 and £300, and a homebuyer's report will cost between £250 and £600. And for those looking for a detailed report, buildings survey will cost between £500 and £1,000.
Example 3: Continuing with the example of Coventry Building Society, the society offers an optional Homebuyer's Report at a fixed fee. This survey is in addition to the mortgage valuation fee and detects any obvious faults. Note this is not a complete structural survey. Charges start from £235 for a property worth £60,000.
As the name suggests, the fee is paid to a broker, i.e. if you are using one. Note you may not always have to pay a fee to the broker. That's because a broker makes money through any of the three different sources shown below.
A Broker's fee can be anywhere from £0 to £500. You have to be prepared to pay this amount in cash, and you cannot add this to the mortgage. You should avoid paying any upfront fee to the broker because you may lose the amount if you don't actually purchase a property through the broker.
When you buy a property, you need to pay stamp duty to Her Majesty's Revenues and Customs (HMRC). The amount of stamp duty is dependent on the purchase price of the property.
Stamp duty went through a major reform in December 2014, when there was a radical shift in the way it is calculated. Stamp duty rates are listed below.
|Price of Property||Stamp Duty Rate|
|Up to £125,000||0|
|Between £125,000 and £250,000||2%|
|Between £250,000 and £925,000||5%|
|Between £925,000 and £1,500,000||10%|
Let's say the purchase price of your property is £350,000. As per the new rates you will be paying a stamp duty of £7,500 (0 for the amount up to £125,000, 2% of the amount between £125,000 and £250,000 and 5% of the remaining amount).
You need to pay stamp duty within 30 days of the 'effective date' or the date of completion of the purchase. There are instances where the stamp duty is payable before 30 days, if you make the payment or if you start living in the property before the completion.
You can calculate how much Stamp Duty you will need to pay on your property using our Stamp Duty Calculator.
Land Registry is the department that maintains a record of every registered property in England and Wales. If you purchase a new property, you need to pay a fee to the Land Registry for registering the property in your name. This fee is for transferring the registry entry from the previous owner's name to your name.
Land Registry fee varies by the price of the property. The fee is £200 for properties sold between £100,001 and £200,000, and the fee is £300 for properties priced between £200,001 and £500,000.
Buying a new home involves several legal processes. A solicitor or a conveyancer, can help you with some or all of the legal issues as listed below.
Some lenders may cover solicitor's costs, but only if you choose a solicitor of their choice. Others may give a cashback for solicitor's fees upon completion of the mortgage. Solicitor's fees can be in the range of £500 and £1,500, based on the cost of your property.
Buying a home involves several costs. While a mortgage may help you to pay a bulk of the property's value, you need to have some amount of cash in hand for the other costs, and you should not be entirely dependent on the mortgage.
Use our mortgage calculator to calculate the monthly repayments on your mortgage depending on the interest rate and the loan term.
Use our Mortgage Fees Calculator to calculate how much you should set aside when budgeting for your total mortgage and home move costs.