Mortgage Advice - Conditions and Charges

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Mortgage costs will vary greatly depending on the lender you are with, the mortgage type being applied for, the total amount being borrowed and the amount you are borrowing as a percentage of the value of your property.

The additional costs charged by mortgage lenders can usually be added to the loan. However, this means you will end up paying interest on the additional costs over the full period of the mortgage, so we highly recommend you pay the fees up front if possible.

Some fees, such as arrangement fees, usually accompany the more competitive mortgage products. When choosing a mortgage you will need to weigh up the benefits of the competitive interest rates against any additional costs that will probably be charged.

Keep an eye out for lenders who will re-imburse you for one or more of the costs below on successful completion of the mortgage there are lots of lenders out there and you can normally negotiate this with one of them.

Unfortunately, some lenders use different terminology to the usual terms used below. If there are any terms that you do not understand use our finance glossary. If you are unsure what a lender's fees are ask them.

Below is a list of the mortgage costs you should always look out for when choosing a mortgage. This list relates to mortgage costs only. There are of course many other costs involved in moving or buying a new property, including legal costs, removal costs, estate agent's commission etc.

Arrangement Fee

Also referred to as the administration fee, the arrangement fee is charged to cover the lender's cost of setting up the mortgage for you. It is payable on completion of the mortgage and is usually charged when applying for a fixed, discount, capped or cash back mortgage. Arrangement fees are normally between £100 and £300.

Application Fee

An application fee is less common and is charged for just applying for a mortgage. It is payable at the time the mortgage application is made. We recommend you don't go to someone who charges this; it's just a way for the lender to make more profit.

Mortgage Indemnity Guarantee (MIG) Premium

A mortgage indemnity guarantee is a type of insurance that protects the lender from you defaulting on any mortgage debt when the sale of the property is not enough to cover the amount owed. It is just for the lender's benefit, not yours.

A MIG premium is usually levied when the amount you are borrowing as a percentage of the value of your home is fairly high; it's normally greater than 90%. However, some lenders will charge a MIG premium even if the LTV is as low as 75%. Other lenders will not charge a MIG premium, regardless of the LTV percentage.

Lenders will require your new property to be valued in order to confirm that the property is worth at least the value of the amount to be borrowed. This helps to protect the lender in the event that you default on the mortgage.

Early Redemption Penalty

An early redemption penalty is a charge that is made if you switch your mortgage to another lender within a set period of time. The charge can be as much as the value of six months mortgages repayments it's normally only 2-3 months.

The period over which the early redemption penalty applies may be for the fixed, discounted or capped period only or may apply for several years afterwards, with penalties reducing as each year passes.

You should be aware that if you opt for a mortgage that has an early redemption penalty period that extends beyond the fixed, discounted or capped period you will be trapped in that lender's standard variable rate for a number of years, and that rate may be uncompetitive. Always read the terms before you sign.

Given that the mortgage market is very competitive many mortgages are sold as 'loss leaders' i.e. the mortgage will have to be held for a number of years before the lender breaks into profit. As a consequence lenders frequently 'lock-in' borrowers by applying early Redemption Charges for those paying off the mortgage early. Charges can be significant e.g. 6 months interest or repayment (its normally only 2-3 months) of the amount of benefit received, be it cash back or reduced interest. The period an Early Redemption Charge applies can vary. Sometimes it will match the period of the discount or fix but often it can go beyond the benefit period e.g. a 5-year discount with a 7-year ERC. This is referred to as a 'redemption overhang'. 

No Redemption

Selecting a 'No redemption' this option means that the mortgage schemes will allow you to repay the loan in full at any time without applying an Early Redemption Charge.

Most mortgage schemes, in return for offering you a lower initial rate, will require you to stay with that scheme at least for the period of the Discount, Fix or Cap, and often longer. If you wish to repay the loan in this time, or you remortgage with another lender, you will have to pay an Early Redemption Charge which can be 2-6 months interest depending on the lender you are with.

No Overhang

Selecting the 'No overhang' option means that the mortgage schemes will allow you to repay the loan without penalty once the benefit period has ended i.e. the mortgage does have an Early Redemption Charge but it does not last longer than the fixed, capped or discount period. This means that a mortgage with, for example, a discount to 1^st January 2005 will have a redemption charge to either the same date or a date prior to this.

The Early Redemption Charge can represent a significant amount although the amount will differ between lenders and between products.

With 'No overhang' mortgages you will only have to pay a redemption fee if you redeem the loan or remortgage whilst you are still subject to the scheme's special rate. Once you are paying the lender's Standard Variable Rate (SVR) you will be able to redeem the loan without any penalty, although there may still be other costs such as sealing fees and legal fees. A consequence of not locking-in the borrower to the lender's SVR, is the rate offered on these schemes will not be as competitive as for rates with a redemption overhangs, making them most suitable for those who wish to benefit from a lower initial rate without needing a very low initial rate, and who are likely to want to remortgage to another Discount, Fix or Cap once they are no longer benefiting from the initial rate their for saving money.

Mortgage Indemnity (LTV)

For high Loan to Value (LTV) mortgages i.e. where the loan is say 95% of the value of the property then, it is very common practice for the lender to take out an insurance policy to protect themselves against some or all of the losses incurred if the property needs to be repossessed because of serious arrears. This charge is normally passed onto the borrower. The mortgage indemnity is normally charged if you are borrowing more than 75% of the value of the property. Some lenders have a different name for this charge, it may appear on the mortgage offer as Mortgage Indemnity Charge or High Percentage Lending Fee.

There are some important facts to understand about the mortgage indemnity charge. It acts as a form of insurance for the lender only not the borrower. This means that the lender can claim part or all of it's 'losses' incurred repossessing the property from the insurance company providing the MIG cover. Even after repossession the former borrower will remain liable for any sums owing the shortfall between selling price and mortgage outstanding plus arrears, lenders legal costs and any other charges applied to the mortgage and can be pursued by the insurance company for payment at a subsequent date.

Valuation Fee

The amount charged for a surveyor to conduct a valuation of the property on behalf of the lender. It is important to note that the valuation is carried out on behalf of the lender. Sometimes lenders include an administration fee as part of the valuation fee collected to cover the costs of arranging the valuation. The valuation is not a detailed inspection. For peace of mind we recommend you a 'House buyers Report' or a 'Full Structural Survey'. These are more detailed than a lender valuation but they produced on your behalf. They are more expensive than the lenders valuation but worth it.

Free Conveyancing Costs

A free valuation requires no up-front payment from the potential borrower. Where as a refund will only be made when the potential borrower application has been completed. Hence an applicant paying for a valuation and then not proceeding due to say a poor valuation then will not have their valuation fee refunded.

Booking Fee and Arrangement Fee

Both are up-front fees charged at the start of the mortgage. A booking fee will normally be required with the application form. The booking fee is paid to reserve funds on a mortgage product that has limited funds available e.g. a first-come, first-served fixed rate. Booking fees are normally non-refundable, so if the mortgage applicant cancels the mortgage application before completion the fee will not be refunded.

An arrangement fee is typically charged on completion of a mortgage.

Arrangement fees are common on fixed and capped rate mortgages.

Frequently they can be added to the mortgage.

Legal Fees

You have to have a solicitor or licensed conveyancer to act on behalf of the mortgage applicant and the lender in the property purchase or remortgage transaction. The costs will be greater for property purchases than for remortgaging. It is the role of the solicitor or licensed conveyancer to note ownership of the property on the title deeds; note the lenders interest in the property; register with the Land Registry and conduct searches to identify if there may be any factors which could affect the property e.g. coal mining search to check for subsidence; check to see if there are some planned major road developments etc.

Insurance

You must have property adequately insured as lenders will insist on it, you will need a suitable Buildings Insurance Policy, as it represents security against the mortgage debt. A buildings policy covers against storm damage, fire, flooding etc and relates to the fabric of the house. The lenders will check that a policy has been arranged and is adequate and a fee will sometimes be levied to check the policy, if the borrowers take a policy other than the one sold or recommended by the lender. In addition, we highly recommend the borrowers to take out a Contents Policy that provides cover for the contents, such as carpets, TV's, furniture etc. Most lenders and insurance companies offer a combined Buildings and Contents Policy. In the past some lenders have made their insurance compulsory with some very competitive mortgage products although this is less common now.

Another form of insurance that is commonly recommended is the Mortgage Payment Protection Plan. This policy is designed to offer income protection against unemployment, sickness and redundancy. This form of insurance has become more important as the Department of Social Security has steadily withdrawn the benefits available. This form of insurance is not compulsory but again is highly recommended. 

Annual Percentage Rate (APR)

An APR is a standardised way of stating the total cost of a loan. It takes into account the interest rates, the timing of the payments, capital repayments and the arrangement fees.

APRs can be compared and so a loan with a lower APR is cheaper overall than a loan with a higher APR.

According to the Mortgage Code, information to help you choose your mortgage, must be given by the lender or an adviser, this information includes explanations and descriptions of charges, interest rate options.

The financial services Authority (FSA) have been given the task for regulating certain aspects of mortgages. The FSA will regulate the advertising of mortgages and the disclosure of their main features, and a special format will be introduced so loans can be easily compared to one another.

The government published Charges, Access and Terms, CAT standards for mortgages in April 2000; they were originally introduced for individual savings accounts (ISAs), but now are to be applied to other financial products. CAT standards are benchmarks, but products that meet it do not necessarily mean they are suitable for everyone, and a product that does not meet the CAT standards does not mean it is a bad product.

At present there are two CAT standards one for variable rate mortgages and the other for fixed rate or capped loans, they also apply to repayment loans and interest only mortgages.

Other Charges

There are a whole series of other fees that some lenders apply in certain circumstances. We advice you to read The Mortgage Code of Practice the lender will give you a copy.

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