The secret way lenders make more money from you

How an expensive valuation fee could leave you out of pocket

It doesn’t seem that long ago that you could easily compare mortgages by just looking at the interest rate charged. A cheap rate meant a cheap deal and a high rate a more expensive one.

In fact, it’s only in the last five years or so that arrangement fees have really become a crucial part of the overall mortgage cost. Arrangement fees have soared in recent years, peaking at £1,211 in January 2009 and currently still high at £898, according to Moneyfacts.

So what?

This is important because a high arrangement fee can negate a cheap rate, making the overall deal less attractive. Alternatively a fee-free deal can work out as an attractive option even if the interest rate doesn’t look so initially appealing.

This is explained in more detail in Pay nothing for your mortgage rate.

What it means is that when you are comparing mortgage deals you should always take both the fee and the rate into account, looking at the total cost over a set period. You don’t even need to do your own sums, because lovemoney.com's innovative mortgage tool will do the hard work for you, working out the total cost over the time period you choose.

Of course, it’s important to remember that if you work out the total cost of a variable deal it could change dramatically if interest rates rise, which they are expected to in 2011, as I explained last week in Find out when interest rates will rise.

But there are other major costs to mortgages on top of the rate and arrangement fee, and you should really take all of them into account if you are trying to work out how much a particular deal will cost you.

Valuation fees for example can be pricey, and costs vary wildly between lenders.

What’s a valuation fee?

When you buy a property the mortgage lender needs to know what the value of that property is, in order to determine how much it will lend. A standard mortgage valuation offers this assurance to the lender and it is paid for by you.

Prices depend on the value of your property, so lenders will usually charge more if you are buying a more expensive home. But they also vary massively between lenders.

For example if you buy a property for £249,999 you would pay £195 for a standard valuation with HSBC but £400 with Lloyds TSB -- more than double the amount, and a sum that could impact on your total mortgage cost. At the very least it could give you a financial headache when money may already be tight.

It is also worth knowing that you usually have to pay this valuation fee upfront, so if the mortgage deal falls through you lose the money, or a non-refundable portion of it in some cases.

Sneaky split fees

Some lenders split their valuation fee into two parts, one of which they often call the valuation administration fee (note, this is different to arrangement, booking, completion or administration fees!) and this portion will certainly not be refunded.

Most helpfully include this separate portion within their published valuation fees scale but not all, so read the small print as the extra charge might be buried at the bottom.

Others do not publish their valuation fees on their website at all, so you will probably only find out once you make your mortgage application. Some lenders seem to go to great lengths to make it hard for you to work out what this additional mortgage charge will be.

Below are the current standard valuation fees of a range of major UK lenders. If there is a valuation administration fee charged in addition to the standard valuation I have included it:

*Average valuation fees of major lenders according to Moneyfacts.co.uk

Massive variation

From this it is easy to see that there is a wide variance between the cheapest and most expensive fees --up to £275 on a property up to £500,000, for example.

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HSBC is comfortably the cheapest lender overall when it comes to valuation fee charges, while Lloyds TSB looks pretty pricey at all property value tiers. 

It’s really important to point out that many lenders offer a wide range of mortgages that come with a free standard valuation. It may not seem like much of a perk at first glance but it could save you hundreds of pounds so can be just as important as a low fee or rate -- look out for them.

Remortgagors in particular will often find that both legal fees and a basic valuation fee are waived if they move their mortgage to a new lender.

So valuation fees can be a more than a little confusing, and that’s just if you decide to get your lender’s basic valuation. Many borrowers actually choose a more detailed report, such as a Homebuyer’s Report of a full structural survey; and then things can get even more opaque.

Buy cheap, buy twice!

A Homebuyer’s Report gives more information about the condition of the property than a standard valuation, while a full structural survey is an in-depth tome, often listing a million and one problems, or potential problems. They are nonetheless extremely useful to buyers wanting a fuller picture, especially those buying older properties.

Recent question on this topic

• BRIZZY asks:

  Can I buy a residential home in Australia using a UK mortagage company?

  • 
    JoeEasedale answered "You can borrow from any lender prepared to lend. Having said that, if your income is made up of..."
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    BRIZZY answered "Thanks for the info Joe. I have income in both currencies. What I wanted to know was which lenders..."
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Most lenders will arrange these more detailed surveys for you and have similar (but more expensive) pricing scales to the valuation fee table above.

But you are under no obligation to use your lender to arrange these reports, and are free to shop around, where you will almost certainly find a cheaper deal.

However, there is a sting in the tail.

Many lenders may not accept a valuation as part of a survey or Homebuyer’s Report arranged by you, which means you could have to fork out for their own valuation as well as your more detailed report.

This happened to me with NatWest. I wanted a full survey and found a very cheap deal online, but NatWest insisted I also took their valuation. However, it still worked out cheaper for me to pay twice than to simply pay NatWest’s higher charge for a full survey.

Many lenders will only accept a valuation as part of a survey arranged by them or from their approved panel of surveyors, so check their policy and their prices first -- preferably before you commit to a mortgage.

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