Calculating the True Cost of your Mortgage

11-May-2009

A new home is likely to be the most expensive purchase that most of us make.  In the current economic climate, lenders are reluctant to lend more than a maximum of 90 per cent of the value of the property, so the upfront costs are already higher than they have been in recent years.  However, there are a number of 'hidden' costs that you need to consider as well, as buying a property is a complicated legal process requiring the involvement of various experts, including a surveyor, solicitor and conveyancer.  This article details the main additional costs you will encounter when purchasing a property.

Always read the small print on the mortgage rates

Although tighter controls have been imposed on consumer lending in the last few years, competition to attract new mortgage business is still fierce, and therefore lenders publish what seem at first glance to be extremely low rates.  However, these introductory rates will only last for several years, after which time the rate will rise significantly. Therefore it is important to calculate the interest that you will pay as an average of your initial low rate and the remaining repayment period.   Also make sure that you are aware of any 'early redemption penalties' should you be in a position to repay your mortgage early, or any fees incurred if you want to move to a different lender after the introductory period.

Arrangement fees

There are other factors to take into consideration when calculating the actual cost of your mortgage.  Is your mortgage broker charging an arrangement fee?  This will typically be a percentage of the sum borrowed, although it could also be a flat fee. Not all mortgage brokers will charge you an arrangement fee as they get paid an introduction fee by the lender, but it is fairly common so make sure you ask them for full fee details before proceeding with the mortgage.

Valuation fees

A full property valuation is usually required by a mortgage lender before they will approve your application.  This enables them to confirm the property's worth, something that is particularly important in the current financial climate when millions of consumers have seen the value of their property fall.  Lenders sometimes foot the bill for the valuation themselves, although the cost usually falls on the consumer, and you should expect to pay between £100-200 for this service.  An extra point to check with your broker or lender is whether the valuation fee is refundable in the event that your mortgage application is refused.

Surveying fees

It is important to have the property surveyed before you go ahead with the purchase, to protect yourself from making an unwise investment.  There are two types of survey, the homebuyer's report and a full structural survey.   The homebuyer's report is a more basic survey, costing about £300 and often included for free in the lender's service.  This includes a check of the superficial condition of the house, making sure that there are no obvious faults.  

Should you find evidence of structural damage, it would be wise to have the full structural survey (which would set you back about £800), because if you later find that you need to carry out serious repairs on the property as a result of any damage, the costs could be far greater.   Any damage uncovered by this survey would enable you to push for a discount on the price, that would take any future repairs into consideration.  Alternatively, evidence of significant damage or subsidence in the property would warn you against making an unwise purchase.

Stamp Duty

Stamp Duty is a purchase tax charged by the Government when you buy a property.  The threshold for stamp duty recently increased from £125,000 to £175,000, as a way of encouraging first-time house buyers, so if your new house costs £175,000 or less you will not have to pay this tax.  However, if the value of your house is above this, you will be expected to pay 1-4% of the property value in addition to buying the property.

Conveyancing fees

Conveyancing is the legal process by which ownership of a property is transferred from one person to another.  This is carried out either by a solicitor or by a licensed conveyancer, and both buyer and seller need to have their own conveyancing representation to ensure that there is no conflict of interest.  

The conveyancer's role is to ensure that the terms and conditions of the contract are fair, and that all the financial information required for the sale is correct.  The functions carried out by the conveyancer include updating the details about the property for Land Registry and local authority searches, and if it is a leasehold property, examining the lease carefully for any conditions that could affect the sale.

The conveyancing process can take several months to complete and the costs will vary depending on the company that carries out the work.  When the Land Registry costs and other fees for searches are taken into consideration, the full cost of conveyancing can stretch to £600 or more.  Due to the complicated nature of the work this process should only be carried out by an expert, so this would not be a good place to cut corners on your purchase costs.

Building Insurance

Lenders almost always require you to have home buildings insurance before they will approve your mortgage application.  Buildings insurance protects you (and the lender's investment) should your house be damaged by fire, subsidence or extreme weather conditions such as floods, and would cover the costs of repairing or even rebuilding the property.  Depending on the policy, some insurers will also pay the costs of temporary accommodation for you and your family while repairs are being carried out.  

Although this insurance is compulsory, there is nothing to say that you have to buy it from your lender.  Many insurers offer very competitive rates for buildings insurance (often with a reduced premium for home contents insurance if both are taken out together), so you can often get a much better deal by shopping around.  The cost of buildings insurance will depend on many factors, including the size, age and condition of the property and whether you live in an area prone to flooding or subsidence.