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Mortgage set-up costs

Annie 18th Jan 2020 2 Comments

Reading Time: 5 minutes

Mortgage costs can add thousands of pounds to the final loan amount. It’s important that you know what you could be charged for so that you can compare deals fairly.

From arrangement fees to valuation costs, here’s a full rundown of mortgage costs you could face.


Mortgage arrangement fee

The arrangement fee covers the administrative costs of setting up your mortgage. The average cost is between £1,000 – £2,000, though it can vary wildly.

It depends on the size of the mortgage you take out. Some lenders still offer a flat fee but most now opt for a percentage of the final loan amount – usually between 1% – 1.5%. This is a bit sneaky, as it can look like your mortgage is a better deal than it is. You’ll need to do your sums here before you apply for a mortgage!

A good rule of thumb is that the bigger your mortgage, the less you need to worry about the fee. That’s because, on a large loan, the interest rate is far more important in terms of long-term costs.

You can often arrange to have the fee added to your mortgage repayments. This helps if you’re short of cash or want to spread the cost – but it will add to your long-term costs.

Mortgage valuation fee and homebuyer’s report/structural survey

Your mortgage lender will charge you for a valuation on the property you want to buy. They’ll send a representative to visit the property and make sure you’re paying a reasonable price for it.

This is required for all mortgages – and you’ll have to pay for it. The price depends on the property size, as a bigger property takes more time to assess.

As a rough guide, expect to pay over £250 on a property worth £100,000, with the price rising on more expensive properties.

This is NOT a survey. They won’t check the condition of the property or advise on works required.

Homebuyer’s Report

If you want to make sure you’re not buying a money pit of a house, you’ll need a Homebuyer Report. Some mortgages require you to have one done before they’ll lend to you.

It’s also known as a property survey. You’ll need to arrange with the vendor for your chosen chartered surveyor to visit the property before you buy it.

The surveyor looks around the property and checks for things like damp, obvious structural issues such as subsidence cracks, or slipped roof tiles. This will set you back around £400. However, it can help you negotiate the price.

For example, if you discover there is rising damp that’ll cost you £3,000 to repair, you can knock this off your offer price.
If you want a more in-depth survey to check the structural integrity of a property, this will require a second survey at a greater cost. Expect to pay at least £600 for this report.

Higher lending charge

When you’re borrowing a lot of money against a small deposit, this adds risk for the mortgage lender.

So, if you’ve little or no deposit, you’ll pay a Higher Lending Charge (HLC). This is paid as part of your mortgage repayments or as a one-off fee. It’s used by the lender to take out insurance in case you default on paying the mortgage.

Avoid this charge if you can. It could easily add up to several thousand pounds over the term of your mortgage.

These days, it’s very rare for the HLC to be issued. That’s because it’s very difficult to get mortgages with a very high loan-to-value (LTV) ratio. In the days of 100% and even 110% mortgages, you didn’t need deposits. These days, a standard deposit is at least 10% of the property price.

Exit fee

If you decide you want to get out of your current mortgage deal and take out another one, or if you want to pay off your mortgage early, then you will probably be charged an exit fee. Lenders claim this is to cover administration costs, and they can charge as much as £295.

This is often charged when you want to remortgage once your cheap fixed-term deal is over. The fixed-term deal is the attractive interest rate offered for the first few years of a mortgage.

If you want to get a better deal when you move to a standard interest rate, that’s called remortgaging. You’ll often need to pay the exit fee and, possibly, early repayment charges – so make sure it’s worth moving deals by adding up these fees first.

Valuation and legal fees

If you are remortgaging, you may find that some lenders will offer free valuation and free legal fees. This could save you a few hundred pounds, so is worth considering.

However, remember that when you move house or buy your first home you will have conveyancing costs which can be anything from £500- £2,000 or more depending on where you live and how much your home is worth.

It’s often cheaper to use a licensed conveyancer than a bog-standard solicitor. You can find a conveyancer local to you through the Society of Licensed Conveyancers.

Solicitor’s fee

When you pay your deposit and when you complete the purchase of your property, your solicitor acts as the middle-man. They’ll hold the funds in their bank account and make the transfer when it’s ready – and you’ll need to pay around £50 for each transfer (so £100 total).

Stamp duty land tax

If the property that you’re buying is worth more than £125,000 then be prepared to pay Stamp Duty Land Tax (SDLT).

If you’re a first-time buyer, you’ll get relief: you won’t have to pay on the first £300,000 of a property worth less than £500,000. You’ll pay a rate of 5% of the remaining price from £300,001 – £499,999.

If you’re not a first-time buyer, the rates look like this:

  • 0% on the first £125,000 of the property price
  • 2% on the next £125,000
  • 5% on the next £675,000
  • 10% on the next £575,000
  • 12% on the rest (above £1.5 million)

Example – If you buy a property for £275,000, you’ll pay £3,750 of SDLT. This is made up of:

  • nothing on the first £125,000
  • £2,500 on the next £125,000
  • £1,250 on the remaining £25,000

Use the HM Revenue and Customs (HMRC) SDLT Calculator to work out how much you’ll pay.

L&C_LOGO_2011When working out the cost of a mortgage, it’s important to get a full breakdown of the fees as well as the rate. If you can’t do the sums for yourself, ask an independent mortgage broker to help. In fact our independent mortgage service, run by London & Country can answer all your questions about fees.

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3 years ago

Great information given here.

Mark Roberts
Mark Roberts
15 years ago

A very well written article. Thanks for the good tips!

Jasmine Birtles

Your money-making expert. Financial journalist, TV and radio personality.

Jasmine Birtles

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