Mortgages: Hidden Costs
What are the penalties for early redemption, or early repayment charges?
Penalties or overpayment charges are imposed by the lender if you pay back the mortgage within the special deal period, or sometimes even beyond the special deal period. Essentially they are charged by the lender to protect themselves. If, for example, you've taken out a fixed-rate for 2 years or 5 years, the lender will abort money to lend on to you and they will potentially be involved in a loss if you leave the mortgage early. Hence they impose this charge to protect themselves. Typically the overpayment charge will be anything up to 50% of the mortgage amount - quite a large amount - so you need to be careful in choosing a mortgage that you don't take out a mortgage where the early repayment charge exceeds the time you expect to stay in the property.
What are overhangs, or extended early repayment charges?
An overhang or an extending redemption penalty is when the overpayment charge extends beyond the term of the special deal. Typically, in that particular situation, you might have a mortgage with a very cheap rate for two years, perhaps a rate as low as 2 or 2 1/2 percent. However, in exchange for you paying a really low rate for the initial two years, the mortgage lender will charge you their standard variable rate, or perhaps a very high rate linked to bank base rate for another four years, or in some cases another five years. During that time, if you redeem the mortgage or pay it back, you will then incur these early repayment charges. An extended early repayment charge means that the early repayment charge applies for a period beyond the term of the special deal.
I've been offered a mortgage with an extended redemption penalty. It seems like a great deal - should I go for it?
The short answer is that the extended redemption penalty is not a good deal. If it looks too good to be true, it normally is, and that will certainly be the case here. The catch will be for an exchange of a really low interest rate for an initial period, probably two years, you'll be stuck with paying a very high rate for several years thereafter. If you do want to redeem the mortgage or pay it back early during that period, you'll be caught by having to pay the lender a high early payment charge which will more than wipe out the benefits that you had from that cheap mortgage rate initially.
What is a lender's arrangement fee?
An arrangement fee is a fee which a lender charges when you take the mortgage out, and it is partly to cover the administration costs the lender incurs when you take the mortgage out. Increasingly, arrangement fees are also used as a way of subsidising the interest rate. The arrangement fee can vary from nothing up to several thousand pounds. Sometimes it's calculated as a percentage of the mortgage amount. In most cases it's a flat rate, and in general, the higher the arrangement fee the lower the interest rate you ought to expect. High arrangement fees are not necessarily bad because sometimes the trade-off is that you have a really low interest rate, but you do need to evaluate the mortgage, taking into account the arrangement fee, the interest rate and any other fees.
How much should a lender's arrangement fee be?
There's really no simple answer for how much a lender's arrangement fee should be because there's a huge variation. You can get mortgages with no arrangement fee whatsoever. The trade-off for that is that the lender will charge you a higher interest rate. Having a small mortgage can offer really good value. You can avoid an arrangement fee - typically around £500 - in exchange for paying a slightly higher rate of interest, which, if your mortgage is only £25,000, can be a really good value. At the other end of the scale, if you have a large mortgage, then paying a large arrangement fee, which could easily be two or three thousand pounds at the top end of the scale, might be a very good price to pay in order to get a really low interest rate. Arrangement fees vary hugely, and you need to take them into account in deciding which is the best mortgage, just as much as you take into account the interest rates and other features.
What is a mortgage valuation fee?
A mortgage valuation fee is the fee you pay the lender when you apply for a mortgage, for them to carry out a mortgage valuation. The mortgage valuation will tell the lender what the property is worth and therefore the lender will be able to make a decision as to how much they're prepared to lend you on the strength of that security. A mortgage valuation fee is a fee which a lender charges to have your property valued. In some cases, it also includes an admin element.
How much should a mortgage valuation fee be?
The amount of the mortgage valuation fee depends on the value of the property. Now typically for a property costing around £100,000 it will be around £250, and increases as the property value goes up. As an alternative to a mortgage valuation fee, some people will pay a higher amount to have something called a "home buyer's report," which gives a lot more information on the property. In that situation, the lender receives the standard mortgage valuation but the purchaser receives a more comprehensive valuation report from the lender which includes a lot more detail on the property. And that's well worthwhile considering, especially for older properties.
What is a Homebuyer's Report?
A Homebuyer's Report is produced in a standard format, provides a lot more information than a basic mortgage valuation and in many cases will be quite adequate as opposed to having a full building survey. Typically it will cost about 250 to 300 pounds more than a basic mortgage valuation, but will provide the buyer with a lot of information which wouldn't be included in the basic mortgage valuation, which means either you're going to have some information on some defects in the property, which will help you to negotiate a reduction in the price perhaps, or if it shows up no defects, you've got the comfort of knowing what you're buying is in good condition.
What is stamp duty and how much is it?
Stamp duty tax is a tax imposed by the government on property purchase, and it starts at 1% for properties costing above £125,000. Up to £125,000 there is no tax. Above that, up to £250,000, it's 1%. Above £250,000, up to half a million, it's 3%, and above half a million it's 4%. Stamp duty is an inequitable tax, because instead of the tax going up gradually, so that when you cross a threshold, you only pay the higher amount on the additional amount that you're paying for the property, once you cross that threshold, the higher amount is paid on the total value of the property. For example, on a property costing £250,000, you would pay 1% tax, i.e. £2,500. If you were to pay £250,001 for a property, you would pay 3%, i.e. just over £7,500 pounds, and that's one of the big problems with the way that stamp duty land tax is calculated.
Is there anyway that I can avoid paying stamp duty?
There are a couple of ways by which you may be able to reduce the stamp duty loan tax. First of all, there are some areas of the country that the government has labeled 'disadvantaged', where stamp duty only appplies on properties costing more than £150,000, so if you buy a property in one of those areas under £150,000, you won't pay any tax. The other option is that if the property you're buying includes some fixtures and fittings, things like carpets and curtains, you can exclude those from the purchase price of the property, and hence from stamp duty calculation. If, for example, you are buying a property for £255,000, and that incudes carpets and curtains, you may well be able to justify £5,000 of that purchase price for the carpets and curtains, and in that situation you will only pay tax up to £250,000, ie at one percent. The downside of that is that from a mortgage perspective, the mortgage will based on the lower figure. If you are looking to borrow a large percent of the value of the property, then doing this may restrict how much you can borrow.
What is an exit fee and how much is it?
An exit fee is not to be confused with an early repayment charge. The exit fee is the fee which the lender charges when you finally pay off your mortgage. Whether that's because you sold the property or you are remortgaging. Typically the amount will be between one hundred pounds and three hundred pounds but it does vary considerably from lender to lender. As a result of a recent ruling by the Financial Services Authority, lenders now have to commit to charging you when you redeem the mortgage the amount of exit fee which you were quoted on the original illustration. So, it is possible now, in nearly every case, to know exactly how much you are going to pay when you take a mortgage out, and therefore you can factor in the amount of the exit fee into deciding how good of a value the mortgage is.
