Mortgage Charges

Early Redemption Charge

The mortgage market is very competitive and many mortgages are sold on a wafer thin profit margin during the first few years so the mortgage has to be held for a number of years before the lender makes any profit. If the mortgage is paid off early, as a borrower has a right to do under the Consumer Credit Act the lender will usually apply an Early Redemption Charge so that they can recover the costs of setting up the mortgage. Charges can be significant, for example 6 months interest or repayment of the amount of benefit received, be it cash-back or discounted interest. The period an Early Redemption Charge applies can vary. Sometimes it will match the period of the discount/fix but often it can go beyond the benefit period e.g. a 2 year discount with a 5 year Early Redemption Charge. This is referred to as a Redemption Overhang.

No Redemption Option

Many lenders now offer the option of no redemption charges although the rate offered on these schemes may not be as competitive as for mortgages with redemption penalties it is worth comparing rates because some are very competitive. You may find that you can get a good rate of interest with no redemption penalties if you have a good deposit to put down, clearly it makes a less risky loan from the lenders point of view so they can offer a better deal.

Much depends on your individual circumstances, if you think you may be moving home during the early years of the mortgage then try to find a mortgage with no Early Redemption Charge, if however, you consider it unlikely you will move (or re-mortgage) during the early years then you will probably never have to pay the Early Redemption Charge so it is largely irrelevant.

Mortgage Indemnity Charge

(more properly referred to as a Higher Lending Charge)

For a high Loan to Value mortgage where the loan is not much less than the value of the property, it is common practice for the lender to take out a form of insurance to protect against some or all of the losses incurred if the property needs to be taken into possession because of serious arrears. This form of insurance is called a Mortgage Indemnity Policy and the lender may arrange this with an insurance company when the mortgage is taken out or the lender may self-insure. It is common practice for lenders to pass this charge on to the borrower and will be detailed as a separate charge in the mortgage offer.

One important thing a borrower needs to understand about the Mortgage Indemnity Charge is that it is for the benefit of the lender not the borrower. This means that the lender can claim part or all of any losses incurred repossessing the property from the insurance company providing the cover. Note that even after repossession the former borrower will remain liable for any shortfall still owing plus arrears, lenders legal costs and any other charges applied to the mortgage and can be pursued by the insurance company for payment at a subsequent date.

Valuation Fee

This fee charged to conduct a valuation of the property and is usually payable at the time of application. The fee is not refundable once the valuation has been carried out so it essential to give accurate information to the lender when you apply for the mortgage as the valuation is often instructed before all your application details are verified, consequently you would be out of pocket if your mortgage application was later declined.

It is important to remember that the valuation is carried out on behalf of the lender, not the mortgage applicant. Furthermore it is common for lenders include an administration fee as part of the valuation fee collected to cover the costs of arranging the valuation (and increase their profits).

A standard valuation report does not represent a detailed inspection. For peace of mind it may be appropriate to obtain a House-buyers Report or a Full Structural Survey. These are more detailed than a lenders valuation but they are produced on behalf of the applicant, although they are more expensive than the lenders valuation.

Booking Fee and Arrangement Fee

Both are up-front fees charged at the beginning of the mortgage.

A booking fee will normally be required with the application form. A booking fee is paid to reserve funds on a mortgage product that has limited funds available, in other words on a first-come, first-served basis. Booking fees are often non-refundable, so that if the mortgage applicant cancels the mortgage application before completion the fee will not be refunded.

Some lenders may charge an arrangement fee, this usually payable on completion of the mortgage.

Legal Fees

It is usual to have a solicitor or licensed conveyancer to act on behalf of the mortgage applicant and the lender in the house purchase or re-mortgage transaction. It is of course perfectly legal for the house buyer to do their own conveyancing, but if this is the case the lender will still use their own solicitor. Legal costs tend to be greater for house purchase than for re-mortgage.

It is the job of the solicitor or licensed conveyancer to register ownership of the property on the title deeds, register the lenders interest in the property and conduct searches to identify if there may be factors which could affect the property, for example a coal mining search to check for subsidence, a local authority search check to see if there are some planned major road developments going through the back garden etc.

You will have to pay the legal costs upon completion, although it is now common practice to pay a sum up-front to cover the search fees.

Other Charges

There are a whole series of other fees that some lenders apply in certain circumstances, for example arrears, late payment, removing the lenders name from the Title Deeds at the end of the mortgage. Under the terms of The Mortgage Code of Practice the lender will, before a mortgage applicant takes a mortgage, provide a tariff covering the repayment of the mortgage, including charges and additional interest costs payable in the event of arrears and will advise of any other charges for services before or when the service is provided.

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