Extra mortgage costs
When calculating your housebuying budget, make sure you take account of all the additional costs you'll incur.
When you think about mortgage costs you naturally focus on the monthly payments. However, there are a wide variety of other costs to consider as well. Some are relatively straightforward, while others a little sneakier.
1. Application fees
For many of the best mortgage deals a mortgage lender will charge an additional fee. Sometimes it's as low as £200 but it can be as much as £600. This is essentially a way for mortgage lenders to manipulate the Best Buy tables, which are primarily based on interest rates. By recouping some money with a higher application fee, a lender can afford to offer you a lower interest rate and therefore appear higher on the Best Buy lists.
2. Valuation fees and surveys
Mortgage lenders like to satisfy themselves that the price you're paying for your home is a fair one. After all, if you overpay and then can't meet your mortgage payments they could be left with a shortfall. So you may have to fork out a few hundred pounds for a valuation. For more expensive homes, the cost could rise to several hundred pounds.
You may also want to pay for a survey to get some additional assurance on the structure of the property you're buying. You can either go for a basic survey, say around £200, a more in depth Homebuyers Report (around £400-£500) or full structural survey, normally around £800.
3. Solicitors' fees
Hardly a surprise we know, but lawyers cost lots of money! Expect to pay around £500-£1,000 for your legal bills in relation to buying a property.
4. Mortgage indemnity guarantee (MIG)
Also known as the mortgage indemnity premium (MIP). You may have to pay this if you're putting down a relatively small deposit (25% or less). It's an insurance policy that protects your lender should you fail to keep up repayments and your home be re-possessed and sells for less than the mortgage. Yes, some lenders expect you to pay for their insurance!
Many lenders don't make you pay this fee however, so our advice would be to avoid those who do. The smaller your deposit, the more the MIG/MIP will be - it could be several hundred pounds for an average mortgage.
5. Exit fees
In an effort to stop people from remortgaging to get a better deal, lenders have recently been ratcheting up their exit fees. These normally apply if you close your mortgage before the end of its usual term (if you remortgage and move to another lender, for example). Some lenders now charge as much as £200-£300.
6. Redemption penalties
Once a lender has secured your custom, they might then lock you in beyond the term of whatever special deal they've used to entice you through the door in the first place. You could get a reduced rate of interest for two years, for example, but subsequently find you're locked in for a further three years on their expensive standard variable rate. Normally these fees are stated as a percentage of your original mortgage amount, often reducing by a percentage point each year.
Redemption fees that apply during the period of a special deal are commonplace and usually not a problem. Fees that apply after your special deal has expired are another matter however -- mortgages that charge such fees are best avoided. Also watch out for cashback deals. Some providers reserve the right to claim part of this money back if you switch mortgages within a certain timescale.
7. Home and contents insurance
Lenders get big commissions from their chosen insurance company and you will undoubtedly be paying over the odds if you go for a mortgage from someone who requires you to insure your property through them. It's far better, and usually much cheaper, to go for home and contents insurance elsewhere.
8. Life assurance
Life assurance is a product that pays out a lump sum in the event of your death. Some mortgage providers will insist that you take out a life assurance policy to cover the value of your mortgage. Others will not. So this may be an additional cost you have to factor into your calculations. Again, you'll find getting life insurance elsewhere will usually save you money.
9. Mortgage payment protection insurance
This is a form of income protection insurance designed to help you pay your mortgage if you become unemployed, have an accident, or fall seriously ill. The more circumstances you wish to cover, the more expensive the monthly premiums. Once again, policies sold by lenders are usually the most expensive.
10. Stamp duty
Stamp duty is usually the biggest cost of all and unavoidable. Currently it's charged at 1% for properties valued at £125,001 to £250,000, 3% for £250,001 to £500,000 and 4% for £500,001 and above. Ludicrously, the percentage bands are charged on the full value of the property meaning the cost of stamp duty leaps for homes valued around the £125,000, £250,000 and £500,000 levels.
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