The hidden costs lurking in your mortgage

Always inspect the small print of home loans for these 10 sneaky charges!

Last week I wrote Buy a property with a 5% deposit, in which I reviewed a range of 95% mortgages aimed at first-time buyers. And while researching these home loans, I was irritated to see that lenders are still luring homebuyers with attractive headline rates of interest, while stuffing their small print with additional charges, fees and costs.

Be sure to watch out for these 10 often-hard-to-spot extra costs:

1. Mortgage arrangement fee

In fairness, mortgage arrangement fees are prominently displayed on mortgage adverts and documentation, so they're not really 'hidden'.

However, they do annoy me, because lenders elbow their way into the best buy tables using loans with low rates and high fees. Indeed, earlier this week, we warned that the Average mortgage fee is more than £1,000.

Lenders know that few borrowers do this mental arithmetic, which is why it's vital to use an unbiased, no-fee mortgage broker to sift through deals for you.

2. Higher-lending charge (HLC)

Lenders prefer to lend you no more than three-quarters (75%) of a property's purchase price. Thus, if you don't have a deposit of 25%+, then you may be charged for having a higher loan-to-value (LTV) mortgage. This fee is known as a higher-lending charge -- and borrowing a high proportion of a property’s value can cost you hundreds (even thousands) of pounds more.

The good news is that HLCs have largely gone out of fashion, with most lenders no longer applying them. Even so, you should check carefully to see if you must fork out a higher-lending charge.

3. Valuation and survey fees

Many lenders will provide you with a free, basic valuation of the property you're buying. However, this will be a brief examination, which may involve a 'drive-by' or computer-generated valuation based on selling prices for similar properties.

Then again, some lenders do charge £150+ for a basic valuation, and fees for a full Building Survey reviewing a property's construction and condition can exceed £1,200 (and even more for high-priced and non-standard properties).

4. Lender's conveyancing fee

Your lender will charge you a conveyancing fee to pay for the legal costs involved in processing your mortgage. However, these fees are often inflated and standard fees above, say, £125 are simply too high. Alas, this market is largely protected from competition, with lenders and solicitors free to stitch up borrowers with excessive fees.

5. CHAPS transfer/funds fee

Another infuriating charge is a fee for same-day transfers of mortgage funds using the Clearing House Automated Payment System. Typically, this fee can range from £15 to £50 per transfer. Thus, if your deposit comes from two different accounts, then you'll be charged for three CHAPS transfers (two transfers from your accounts, plus one transfer to the buyer's solicitors).

To be blunt, I view these excessive transfer fees as a massive con, especially as almost all UK bank accounts now offer fee-free, same-day transfers via the 'faster payments' service. In my view, it's high time the Office of Fair Trading (OFT) looked into this payment scam run by banks and solicitors.

6. Insurance administration fee

It will be a condition of your mortgage that your property is protected by buildings insurance throughout the life of your loan (whereas you decide whether you need contents insurance).

If you don't buy your lender's insurance (which is always seriously overpriced), then it will charge you, say, £25 for 'checking the suitability' of an alternative policy. In reality, the lender banks this money and does absolutely no work for this rip-off fee.

7. Early repayment charge (ERC)

If you repay or move on from a special-rate mortgage before the special rate ends, then lenders will charge you an early repayment charge for ending your contract early. This ERC will usually be a percentage of the amount owed, usually between 1% and 10% of your loan.

In general, the longer the fixed rate or discounted rate, the higher the penalty levied. Also, be wary of ERCs that apply after special-rate deals end, as these 'extended ERCs' can leave you lumbered with an unattractive rate after a special rate ends.

8. Mortgage exit administration fees (MEAF)

As well as charging you application, arrangement, booking and other upfront fees, mortgage lenders also like to charge you when you leave or move on.

Back in the early Nineties, when I first had a home loan, this exit fee would be around £50. However, exit fees soared in the Noughties and, in many cases, reached £200 to £300. In theory, lenders claim this fee covers their administrative costs but, in practice, it's just another way to make a sneaky profit when waving goodbye to borrowers.

9. Non-daily interest

Most modern mortgages calculate your interest bill on a daily basis. In other words, when you repay part of your loan, these payments are immediately credited to your account.

Alas, some sneaky lenders still calculate interest on a monthly -- or even yearly -- basis. How fair is it that a lender can take a payment from you on, say, 1 January, but not use it to reduce your loan until the end of the year? In effect, the lender is stealing an interest-free loan of up to a year from you.

10. Interest on fees

Finally, think twice before adding extra fees onto your mortgage. Over 25 years, every extra £1 you borrow will mean repaying £2, thanks to the extra interest charged. Indeed, were interest rates to rise substantially, each additional £1 could cost £3 or more to repay.

Look before you leap on a loan

In summary, these extra fees and charges can add thousands of pounds to the cost of a mortgage. Therefore, make sure you know exactly what you'll pay before taking on a new home loan!

More: Find your ideal mortgage | EU red tape set to raise your mortgage costs | Switch now to slash your mortgage payments

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.