June 13, 2024

Mortgage Fees Explained – Forbes Advisor UK

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When you take out a mortgage, whether it’s for a home purchase, remortgage, or buy-to-let property, there will usually be fees and charges associated with the borrowing. Here’s a round-up of what you can expect to pay.

Mortgage arrangement fee

Almost all fixed rate and tracker rate home loan deals charge an arrangement fee, which is sometimes called a ‘product fee’.

The fee typically costs between £500 and £1,500. But, for some of the most keenly-priced mortgage deals, the arrangement fee could be £2,000 or more. According to Moneyfacts the average arrangement fee, among those deals that carry a charge, is £1,112.

Buy-to-let mortgages tend to charge higher arrangement fees than residential deals and can run into thousands of pounds. They are often charged as a percentage of the mortgage and can be as high as 5% – for example, £10,000 on a £200,000 loan.

Borrowers can opt to either pay an arrangement fee upfront or add it to the mortgage at completion. If you choose to pay the fee upfront but the deal doesn’t go through it may or may not be refunded, depending on the lender.

Although adding the arrangement fee to the mortgage means not having to stump up the initial cost, the downside means that interest is payable on it for the life of the loan, which could be up to 25 or 30 years.

However, as most mortgage lenders permit penalty-free overpayments of up to 10% a year, one alternative is to add the fee to the mortgage and pay it off as part of this allowance.

Any arrangement fee should be weighed up against the interest rate a mortgage deal charges. Depending on the size and term of your loan, it could be worth paying a higher fee to access a lower rate, or vice versa. A mortgage broker can help you work out what level of arrangement fee it makes sense to pay for your circumstances.

If you switch deals but stay with your existing lender (known as a product transfer), arrangement fees are likely to be much lower and, in many cases, won’t apply at all. However, you may be missing out on better deals by not shopping around.

Mortgage booking fee

Booking fees pay for the administration of applying for a mortgage. They tend to be much lower than arrangement fees, typically between £200 and £300, but must be paid upfront to the lender. They are non-refundable even if the deal doesn’t go ahead.

Booking fees are becoming much less common. In January 2024, Newbury building society was the latest lender to announce it was scrapping booking fees across its mortgage range.

Valuation fee

Whether it’s your own home you’re remortgaging, or a new property you’re buying, the mortgage lender needs an accurate valuation of its worth. This is to ensure the property is adequate security for the amount you want to borrow.

The lender will usually request the valuation using a third party – but will charge the mortgage applicant for the service. Costs are typically around £250. However, some remortgage deals include the valuation free of charge.

When you’re remortgaging, a solicitor (or conveyancer or property lawyer) will need to carry out the legal work involved in transferring your mortgage agreement from one lender to another.  They will also ensure that any remaining debt to your current lender is cleared and that the mortgage with your new lender is registered against your address.

If you are purchasing a property, the solicitor will transfer ownership (title deeds) from seller to buyer and record it with the Land Registry, carry out local authority searches and mortgage checks (such as the source of the deposit), as well as ID and money laundering checks.

Legal fees vary according to the size of the mortgage but could vary between around £800 and £1,500. Legal fees are paid upfront to the solicitor. However, most residential mortgages include the cost as part of the deal which means, in reality, most borrowers don’t pay them.

Early repayment charges (ERCs)

The vast majority of fixed and tracker rate mortgage deals come with early repayment charges (ERCs) which apply during the term of the deal. This is the charge borrowers must pay if they want to leave before the deal term expires.

Often charged as a percentage of the outstanding mortgage debt, ERCs can work out to be very expensive.

In some cases ERCs are ‘tiered’ which means they reduce with each year of the mortgage deal. For example, if you take a five-year fixed rate mortgage, the ERC in year one might be 5% (so £10,000 on a £200,000 mortgage), reducing to 4% in year two, 3% in year three, 2% in year four, and 1% in the final year.

Exit fee

Some lenders charge an exit fee when the mortgage is closed, either because you pay off the loan or remortgage away from the lender.

Exit fees are a relatively small administration charge (typically around £50 up to £300) and cover the cost of releasing the title deeds to your property.

Exit fees are paid upfront at the same time the mortgage account is closed down. Exit fees are not charged by all lenders and are not the same as ERCs (see above).

Mortgage broker fee

Some mortgage brokers charge a fee for their service. But this tends to be more common with those operating in the buy-to-let or non-standard (or poor credit) borrowing sectors, for example.

There are plenty of standard mortgage brokers that do not charge customers a fee, including our partner mortgage broker Better.co.uk.

Instead these brokers make their money from procurement fees (or ‘commission’) which is paid for by lenders. For residential mortgages this tends to be around 0.3% to 0.4% of the loan.

Under Financial Conduct Authority (FCA) rules, brokers must disclose to the customer exactly what they will get paid.

Free Mortgage Advice

Better.co.uk is a 5-star Trustpilot rated online mortgage adviser that can help you find the right mortgage – and do all the hard work with the lender to secure it. *Your home may be repossessed if you do not keep up repayments on your mortgage.

Frequently Asked Questions (FAQs)

Can I avoid paying mortgage fees?

Some lenders offer fee-free mortgage deals which means there is no arrangement fee to pay.

However, these typically come with higher interest rates than the market-leading deals.

Fee-free deals could be worth considering if you have a small mortgage where a higher rate will have less impact.

If you switch deals with the same lender, via a product transfer, you’re also less likely to pay an arrangement fee – and there will be no legal fees to pay either.

Some fees, such as valuation and legal fees, may be charged when taking out a mortgage with a new lender.

However, some remortgage deals offer free valuation (and even cashback) so these charges can be avoided depending on the deal.

Is a fee-free mortgage deal better value?

Whether or not a fee-free deal will work out better value over the term of your mortgage will depend on a range of factors, such as the size of your loan and the interest rate it charges.

In some cases – such as if your mortgage is relatively small – opting for a deal with a higher rate and lower fee (or no fee) could work out cheaper overall.

Conversely however, for borrowers with larger mortgages, it can often be worth paying a high arrangement fee to access a lower mortgage rate.

Our mortgage calculators are useful in helping to work out the total cost of different deals when factoring in rate and fee.

A mortgage broker will also crunch the numbers on your behalf.

Is it worth paying early repayment charges to leave my mortgage?

This depends if the savings you’d make by switching will outweigh any early repayment charges.

Again, a mortgage broker can help you crunch the numbers.

Do fees apply to standard variable rate (SVR) deals?

At the end of a mortgage deal, say a fixed rate or tracker, borrowers will typically revert to their lender’s standard variable rate (SVR). In this case, there will be no arrangement fee or administration fee to pay.

Similarly, there are no early repayment charges to switch away from SVR onto a new mortgage deal.

However, SVRs are priced higher than the prevailing fixed rates on offer.

This means it’s usually cost-effective to remortgage to a new deal before you default to the SVR.

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