Mortgage Basics & Costs

Residential mortgages

Mortgage aims

Residential mortgages are loans secured against residential property which:

• Enable you to own your own property
• Release some of the value of your property, against which the property is secured, for another purpose.

Your commitments

You must declare all relevant information and in particular, your credit history

You will need to make regular monthly payments to the lender for the term of the mortgage

You may need to make regular monthly payments to a life insurance company to ensure the mortgage can be repaid if you die or suffer a critical illness during the term of the mortgage.

In the case of an interest-only mortgage, you will also need to make separate arrangements to repay the mortgage at the end of the term. If you do not do this you will have to negotiate new terms with your lender or risk loosing your home.

Whatever repayment method you decide on, you will need to carry out regular checks to ensure you have sufficient funds to repay your mortgage.

Risk factors

Your home may be repossessed if you do not keep up payments on your mortgage or any loans secured upon it.

The lender may make an early repayment charge if you want to redeem you mortgage earlier than you originally planned.

Your mortgage valuation and, in some cases, the arrangement fee that you pay your lender, may be lost if your mortgage does not proceed. Even if you withdraw your mortgage before a valuation is carried out you may be charged a fee by the lender.

While the lender will insist on buildings insurance, it is your responsibility to ensure that you have adequate contents insurance.

There may be changes in the law and Inland Revenue practice which cannot be foreseen. Tax benefits also depend on individual circumstances.

If you are made redundant or are unable to work through sickness or accident, you may have to wait up to 9 months before receiving assistance form the State with you mortgage interest payments.

What costs are payable when taking out a mortgage?

Mortgage Costs and Fees

Valuation fees

Payable to the lender or broker to secure a survey on the house you are buying or re-mortgaging. The valuation fee is usually paid upfront. Few lenders allow you to add it to the loan and fewer still will commence work on your case until it is paid. In some instances, lenders may waive the valuation fee as an incentive for you to choose them. This is most likely to happen when you are remortgagaing your home. The valuation fee may include a portion of administration fee which is non refundable if you decide not to proceed before the valaution has been carried out. Check with your broker. The whole valuation fee is non-refundable once the valuation has been carried out, even if you decide not to buy the property as a consequence of the valuation.

There are three basic levels of property valuation reports. The report that you have carried out will be influenced by the age, physical condition and you level of concern about the property.

1. Basic mortgage valuation.

This is primarily for the lender’s purposes. In most cases the lender will collect a fee from you and pay this to a surveyor to prepare a valuation report on the property. The lender’s sole aim is to determine that the amount they are lending is supported by the property’s value. Many lenders do not make the valuation survey results available to the buyer. In any case it contains very little to inform the buyer about the property’s short comings. If you are in anyway doubtful about the property you should instruct a more detailed survey.

2. Homebuyer’s report

This provides concise information in a standardised format on the state of repair and condition of the property. The report will include comments on the property’s defects and the valuer’s opinion as to its marketability, in addition to its current market value. Beware, surveyors are generally a lazy lot and are reluctant to look too deeply if a door is locked or a ceiling hatch out of reach. In these instances they tend to say that they couldn’t gain access and leave you wondering what the situation was on the other side of the door or panel. The results of the survey are passed to you and a valuation report goes to the lender.

3. Full structural survey.

This is a structural report based on a detailed examination of the property -behind doors, in roof spaces and under floors. Any concern you might have about the property will be fully explored and reported on. The information supplied in this type of report goes well beyond the property itself and often includes details of selling prices of similar properties in the area, local area amenities and socio-demographic data. Like the Homebuyer’s Report, it will also provide the basic information required by the lender to substantiate the property value.

Arrangement fee

A fee charged by the lender to offset some of their administration costs incurred in processing your case. Payment is often required before the lender commences work on the case although some lenders collect their fees on completion. You can usually pay by card or cheque. Lenders are increasingly allowing mortgagees to add the administration cost to the mortgage. All or part of it may be non-refundable once the process commences, even if the mortgage is declined or you withdraw it. Mortgage ID’s Key Facts Illustration will point out which applies with your mortgage.

Legal costs and fees

You will need a solicitor to act on your behalf. These days your solicitor almost always acts for the lender as well. This cuts down costs and speeds up the process. You rely on the solicitor to ensure you are getting good title to the property and your interests are protected. The bank relies on the solicitor to ensure that there are no title defects which would prevent them taking possession should you fail to maintain payments. The solicitor will also register the bank’s interest in the property with Land Registry. The solicitor will normally ask for an amount of money upfront once they begin to act for you. This will cover their out of pocket expenses for the various searches that need to be done. The solicitor’s own fee is usually charged on completion. I.e. the day the money changes hands. Once a solicitor is instructed they will send you a full list of their fees within 48 hours.

You can compare the costs of dozens of approved companies using our conveyancer quote engine. The names on our website have been carefully chosen and represent some of the lowest cost practioners in Britian. To get a binding quotation or to instruct a solicitor, click here. There is no charge for this service and you will save money.

Stamp duty

This is a purchase tax and is payable when buying either a house or a commercial property. It is payable only once so no further payment is required if you subsequently re-mortgage your property. It is calculated as a percentage of the purchase price and broken into bands. The bands are 0% paid on properties up to £125,000, 2% between £125,000 and £250,000, 3% between £250,000 and £500,000 and 4% for more than £500,000. Since March 24, 2010 first time buyers have been able to claim a 100% exemption to stamp duty for purchases of properties up to £250,000. It is unlikely that that the upper limit will be reduced any time soon and indeed may be increased if the Conservatives gain Power in the May 2010 election.

Your solicitor will usually collect the stamp duty payable from you prior to completing a purchase transaction. They will also complete the Land Registry registration for you. The cost for this service will be detailed in your solicitor's quotation. To use the Mortgage ID Solicitor Quote Engine click here.

If the property you are purchasing is over £500,000, Mortgage ID's is able to introduce you to solicitors who have specialised in exploiting a tax loophole which may see you paying only 50% of the tax. If you are considering a high value purchase such as this we recommend you contact us before appointing your solicitors as it will be in your interest to do so.

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High Loan Fee (HLF)

Where your deposit or the equity in your property represents less than 25% of the property value, the lender may charge a High Loan Fee. A High Loan Fee is simply an insurance premium collected from you by the lender. This fee is paid away to an insurance company to protect the lender if you default on the loan.

These days you have many choices when taking out a mortgage. One of them is to choose a lender who does not charge a High Loan Fee. Mortgage ID dislikes these charges and will generally not recommend lenders who charge them. However, for some applicants it will be an inevitable expense of buying a home since the Credit Crunch has forced lenders to insist on ever larger minimum deposits to avoid it. No lender to our knowledge will ask you to find the HLF in cash. The charge is usually added to the loan.

Redemption charge

Most lenders will make a redemption charge if you pay off your loan inside the initial reduced cost period. This is always the case with standard fixed rate loans. It is important that you ask how long you will be tied into a loan when taking out a mortgage and what the cost of early repayment is. Your Mortgage ID adviser will provide you with a Key Facts Illustration which will show the cost of early repayment.

Home Information Pack

If you are selling a property in England or Wales it is a legal requirement for you to provide all potential buyers with a Home Information Pack. A HIP is a set of documents that provides the buyer with key information on the property and must be provided by the seller or the seller's estate agent. The HIP lets buyers see important information on the property at the start of the process, free of charge. This means there is less chance of buyers becoming aware of any surprises at the end of the process that can cause delays and extra expense to the buyer and seller.

The HIP is made up of required (compulsory) and authorised (optional) items. There shouldn't be any marketing or advertising material in the pack, so make sure it contains official information only.

Listed below are all the compulsory documents that need to be included:

• Home information Pack Index
• Energy Performance Certificate (EPC)
• sustainability information (required for newly built homes only)
• sale statement
• evidence of title
• standard searches (local authority and drainage and water)
• leasehold/commonhold documents where appropriate

Your do not need to provide a HIP in the following circumstances

• properties where there is no marketing (eg selling to a member of your family)
• non-residential properties
• properties limited by law to use as holiday accommodation or occupation for less than 11 months per year
• mixed sales (eg shop with flat)
• right to buy and similar sales
• sales of portfolios of properties
• properties not being sold with completely vacant possession
• unsafe properties and properties to be demolished

If you want to get a HIP, you can choose any of the following options:

• use a specialist HIP provider (click here) 
• get an estate agent to do it
• use a solicitor (compare solicitors now)
• compile it yourself

We recommend you don't try doing it yourself but rather use a solicitor or a specialist HIP provider. Estate agents offer HIPs but they also come with conditions such as, "we'll do your hip but you must sell the property through us on an exclusive deal" - Avoid.

Buildings and contents insurance

All lenders insist that you insure the property for the full rebuilding cost. It is strongly recommended that you take out contents insurance at the same time as this will often save you money or may even be FREE.

Your mortgage broker is usually the best route to competitively priced Buildings & Contents insurance. Only use web or direct to insurer if your needs are very very simple. Web based supermarkets compete on price and usually strip out important benefits in order to be the cheapest. A broker will ask a series of questions to ascertain your exact needs. He will explain all the possible add-ons and guage how important each is to you before searching the market to get you the best deal. We believe it is more important to get it right from the start than buy only on price. 

If you chose Mortgage ID to help you arrange your insurances you can be assured that your biggest asset is comprehensively protected. (click for best broker quote)  We will automatically review your cover each year to ensure you are getting the best deal.  If we handle your purchase, we will take away all the strain of getting insurance in place on time so nothing will hold up completion.  

Mortgage payment protection

We strongly recommend you consider protecting your mortgage and associated payments in the event of accident, sickness or unemployment. ASU, as it is often called, will typically provide you with a monthly lump sum equal to the mortgage payment and the insurance products which protect it. During claim, ASU plans run for 12 months (some run for 24 months) and then stop.

If you want longer term cover for illness and disability you are advised to consider permanent income protection (also known as permanent health insurance) This is a superior cover to ASU and can be bought to cover the whole term of the mortgage. Beware, PHI does not include unemployment insurance

Life and critical illness insurance

Many lenders insist that you take out life insurance as a condition of getting a mortgage. Most brokers will also strongly advise that you add critical illness cover to the basic life protection. These types of insurance plans pay a lump sum if you die or suffer one of a list of specified dread illnesses such as cancer, heart attack or stroke. Mortgage ID has connections with all UK insurers and will be delighted to provide you with a quote. (get insurance quote) Experience tells us that, in most instances, we are more competitive than approaching the provider direct or applying on-line.

Brokerage fee

Mortgage ID does not charge a fee for the professional advice we offer. Everything we do for you up to the point of case submission is free and without obligation. We are confident that our personal service will convince you to use our team to progress your application.

Mortgage Applications

If you decide to go forward we may charge a Brokerage Fee to cover costs associated with submitting your case and following it through to completion. This varies depending upon the size and complexity of your case and any payment we receive from the lender. Your Mortgage ID adviser will present you with a written statement of cost after he has determined your requirements and investigated your case. This is usually paid in two installments. Typical fees range between:

Full Status Residential Purchase or Re-mortgage - A fee between £0 - £1000. with majority of cases undertaken for £495. 50% payable upon submission and 50% upon receipt of the lender's offer. (We may elect to collect this final fee on completion as circumstances dictate) The lender may also pay us a fee Impaired Credit and Self Certification Purchase or Re-mortgage - A fee of up to 1% of the property value or £695, whichever is greater. 50% payable at outset and 50% upon receipt of the lender's offer. (We may elect to collect this final fee on completion as circumstances dictate) The lender may also pay us a fee. Buy to Let or Commercial Purchase or Re-mortgage - A fee between 1% and 3% of the property value or £795, whichever is greater. 50% payable at outset and 50% upon receipt of the lender's offer. (We may elect to collect this final fee on completion as circumstances dictate) The lender may also pay us a fee.

We will only submit a case to a lender once we are convinced that there is a high probablility that it will proceed to completion. In over 95% of cases this is the situation. Ocassionally a case will be rejected by the lender. Usually this is because the lender has found something at the credit check stage which we were not made aware off which renders the case unacceptable. Clients should be aware that once we have submitted a case to a lender we consider our Application Fee earned, irrespective of the lenders decision. Mortgage ID reserves the right to decide whether a further application should be made and whether a second application fee should be charged. Whatever the situation, we will not normally refund an application fee. Once the lender's offer is issued, we consider the final part of our fee earned. Should you or the lender cancel the case for any reason after submission and before the offer is issued, no final fee will be levied.

Insurance Applications - Important

We do not charge a fee to arrange term life or general insurance for our clients. We receive a fee from the insurer to cover the work we do for them. This is usually sufficient to meet our income expectations. However, should our client cancel a life insurance or general insurance plan after 30 days of issue, the provider will claim back the commission they have paid us. In effect, we are unpaid for the work we undertook for our client in good faith. The amount recoverable and the timeframe over which it is recoverable are dependent on the product chosen. Should this happen, we reserve the right to invoice our client to recover our lost income. The amount we would claim would be an amount equal to the amount we have had to refund. Further details of the amount and timeframe are notified to clients prior to the conclusion of the contract in the suitability letter we send them.

Mortgage ID will never compel a client to take a protection product. We will always explain the implications of not taking insurance and let the client decide whether insurance is right for them. If they decide to proceed, they should be aware that cancelling any plan we arrange will have implications. Clients are asked to confirm this in writing which will form a contract of supply. If you are considering any form of insurance policy and you can foresee yourself concelling the plan before the end of the term, we ask you to tell us and we will let you know what the implications will be both financially and in your ability to get similar cover later on.