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Mortgage costs

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As the world becomes more and more competitive, you would think that lenders would constantly be looking to streamline their costs and make it easier and cheaper for the customer to obtain a mortgage. Some lenders have actually done a very good job of this and have remarkably efficient mortgage application processing systems. Unfortunately, this is not always the case, so some lenders make certain additional charges to compensate. Others would appear to be merely trying to increase their profits by making charges where none should really be necessary. But we would never accuse anyone directly of doing that…

There are four common types of fee that must sometimes be paid before your mortgage can be completed. You can sometime add the cost of these fees to your loan, but remember that you will then end up paying twenty-five years worth of interest on them. If you can afford to pay them up front, this is usually better for you.

Arrangement fee
It is quite common for an arrangement fee to be charged by the lender. Arrangement fees are usually paid on completion of the mortgage and anything from £100 to £350 is fairly common.

They are most likely to be charged in conjunction with particularly competitive mortgage rates - discounted, fixed and sometimes capped rate mortgage products. It could be the case that the lender is trying to offset some of the long-term cost of offering you such a competitive mortgage rate and you must weigh up which is most important to you, especially if you must pay the fee upfront.

This type of fee is becoming less common than an arrangement fee. You have to pay this fee to the lender upfront, at the time of the application (surprise, surprise). It is a charge purely for applying for the mortgage and is normally in the region of £100 to £300.

As with arrangement fees, this type of mortgage is usually found with the special deals from lenders. It could be that they are trying to restrict the number of applicants by only attracting serious buyers. Then again it has been said that this type of fee is a cheeky way of making money. But there is no way we would never say that. Some of the time this fee is refunded on completion of the mortgage, in which case it strengthens the argument that the reason for this fee is to ensure only serious applicants take up the administration time of the lender. Though that is probably no consolation if you have paid to apply and then are rejected.

Administration fee
Sometimes you may be charged an administration fee for not taking a building and contents insurance policy, or some other product offered by the lender. It is difficult to know how much extra administration is caused by you not taking the policy, but it must be some compensation to the lender to know that they are at least getting some money back. These fees are usually less than £50, so it shouldn't break the bank anyway.

Mortgage Indemnity guarantee premium
If you are borrowing a high percentage of the value of your property, you may have to pay for a type of insurance called a Mortgage Indemnity Guarantee. This protects the lender in the event that you default on the loan and the sale of the property is not enough to repay the amount that they are owed. Though this insurance is purely for the benefit of the lender, it is down to you to pay it. Some lenders set the threshold for paying this as low as 75% but 90% is a more common level. Some lenders will not insist upon you paying it, regardless of how much or little you are borrowing.

You are basically paying for insurance of the part of the loan over 75% of the property value, not the whole loan. Therefore the fee is charged in relation to that amount. Typical premiums are:

  • Loans of up to 90% of the property price: 4% of the amount borrowed above 75%
  • Loans of 90% - 95% of the property price: 6% of the amount borrowed above 75%
  • Loans of 95% - 100%: 8% of the amount borrowed above 75%

The MIG premium is a one-off fee that can range from several hundred to several thousand pounds, depending on how much you are borrowing. Once again, you can often add this fee to the loan, but be aware that you will then be paying interest on it until the loan is repaid in full. If your MIG fee is, for example £1500, you could end up paying well more than double that amount over the life of the loan. Unfortunately, given all the other costs that are incurred at and around the time of purchase, paying this fee off over twenty-five years is the only option open to many people.

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