Five really annoying mortgage costs

It's not just your deposit and Stamp Duty you need to budget for when you buy your first home!

So you’ve finally made the decision to get onto the housing ladder! For many people this comes after a hard savings slog to accrue the required 10% deposit and get your hands on a mortgage.

At least there is some respite on Stamp Duty for first-time buyers though, as you are not liable to pay the tax on purchases up to £250,000. If you go over this level (perfectly possible in some places) the tax is charged at an eye watering 3%. Buy a property for £260,000 and you’ll pay the Government £7,800 in tax. Ouch!

Most buyers are well aware of the costs above, and have considered other expenses like buying furniture and paying a removal firm. But there are many more costs associated with buying a property that you may not know about. In fact, some of them are pretty obscure, so you may not be aware of them until they land on your plate needing to be paid.

Higher Lending Charges

Thankfully Higher Lending Charges (HLCs) are now few and far between, but some stubbornly remain so it’s worth looking out for them.

They are essentially an insurance policy for the lender when it lends a high proportion of a property’s value to a borrower -- usually 90%. In other words, if you have a small deposit.

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Snag is, the insurance policy protects the lender but you pay for it, and HLCs can be steep, at up to 9% of the chargeable amount.

Just to be double sneaky, some lenders apply the charge from 75% even if they only charge it to those borrowing over 90%. For example, say you borrow £91,000 on a £100,000 property, taking you over a typical HLC threshold of 90%. Rather than charge you the amount borrowed over 90% of the property’s value (in this case £1,000), the charge may be calculated from 75% LTV, so you are charged the HLC on £16,000 in this example.

Confusing isn’t it?

The Progressive Building Society’s HLC policy is even more bewildering. It charges a HLC if you borrow more than 90% but calculates the charge on borrowing over 75% at different percentage tiers, as shown below:

Of course, I’m sure the lender gives potential borrowers a detailed breakdown of what the charge is, but it’s hard to work it out from the website information alone.

That’s why I always recommend you talk through your options with a broker, who can work out the calculations for you and figure out whether it’s worth paying these fees or opting for a deal that doesn’t apply them - even if that deal charges a higher rate.

Doubling your legal fees

When I bought my first home I really wanted to save money on legal fees and used a quote generating website to find the best price. It was around £300, which seemed very reasonable. But it was only after accepting it that I realised the quotes did not include disbursements.

These are set legal costs that buyers need to cover on top of the solicitor’s legal fees. And they amount to a few hundred pounds. The most expensive is the Land Registry Fee at £200 and the Land Transaction Form at £50.

On top of that are a few tiddlers but it all adds up. And it can double your legal fees so find out if any quote you receive includes disbursements. Chances are it won’t.

How many surveys?

When you buy a property you need to get a survey. You can simply go for the minimum basic valuation, which the lender requires, or you could pay more for a Homebuyer’s Report, where the surveyor will go inside and have a look around for any obvious problems. Don’t expect them to be clambering into the loft or even moving furniture though.

If you want to pay for a full structural survey you will receive a massive tome detailing oodles of information about the property, which the surveyor will have hopefully spent a good few hours having a thorough look around. It will point out any potential problems or areas where you need to have a specialist report done.

However even if you splash out on a the bells and whistles full survey, your lender may insist you also get a valuation with one of its approved valuers, as it may not have your surveyor on its panel. This means you pay more for your survey and still have to pay for the lender’s valuation. So check first!

What’s in a name?

The average mortgage arrangement fee is around £900, but beware they can go under different names, such as application, product, completion, booking or administration fee.

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Some lenders split their arrangement fees into two components, one of which you must pay on application (often called an application fee) and a completion fee paid when you get the mortgage funds. It’s all a mortgage fee at the end of the day, and you need to add them together to compare them to the all-in-one fees most lenders advertise.

Nationwide is one culprit: its ‘product fee’ is £896 on some deals, but is in addition to an extra £99 booking fee, which is listed separately. In my opinion, it’s a bit sneaky, since both need paying to get the deal. It is not the only lender to do this, so read the small print carefully.

Buildings cover or service charge?

If you buy a property as a freeholder (this is likely if you buy a house for example) you will be responsible for buildings insurance, to cover your home in the event of fire, flooding and subsidence for example. It’s usually a condition of the mortgage offer that you have this cover in place as the lender wants to know it is security is insured.

In fact they often wants to see you have buildings cover in place before releasing the funds, so from exchange of contracts. It’s not a massive extra cost to pay for a few extra weeks, but it’s another thing to remember to do. You don’t want your completion held up because you forgot to sort out your buildings cover.

If you’re a leaseholder (if you buy an apartment in a block for example) you may not be liable for buildings cover since your freeholder usually pays it. However your lender will want evidence from your solicitor that buildings cover exists and that it covers the rebuild costs.

Remember that, with a leasehold, you may be subject to a ground rent or service charge to cover upkeep of communal areas like the roof, lifts and gardens. These costs can range from a nominal charge to a hefty sum. I asked two friends with apartments in Manchester city centre and one pays £90 a month, the other £120 a month. Both said they were told the service charges were lower when they bought the flat and they have risen steeply since. So watch out!

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Mortgages suitable for first time buyers with a maximum 15% deposit, sourced based on lowest payrate. Where a provider's logo is displayed products may be applied for directly.

Mortgages with an offset facility attached, sourced based on lowest payrate. Where a provider's logo is displayed products may be applied for directly.

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 4045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article. 

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term will revert to the lender's standard variable rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.