Mortgage Costs

The main costs associated with arranging a mortgage are:

• Arrangement Fee
• Legal fees
• Stamp duty
• High Loan to Value Fee
• Survey fee

Arrangement fees became more popular amongst lenders in the 1990s, and are now a feature of most mortgage applications. In most cases the arrangement fee is added to the loan on completion, and so is not charged if the mortgage does not proceed. In some cases the arrangement fee can be requested upfront, and in these cases is often called a booking fee. This is common with some fixed rate mortgages where the lender will ask you to pay an upfront booking fee to secure the mortgage rate and have funds allocated to your application. Upfront arrangement fees and booking fees are usually not refundable. Arrangement fees can vary, but are usually between £495 and £995, although arrangement fees can be as much as 2.5% or 3% of the mortgage advance in some circumstances.

When you buy, sell or remortgage a property you will need the services of a conveyancer, employed by a firm of solicitors or a licensed conveyancer to look after your interests and make sure you don't fall foul of the many pitfalls that exist without expert advice.

Your conveyancer must be acceptable to the lender because they will also act on their behalf in making sure your existing mortgage is discharged (if you are not a first time buyer) and the new mortgage goes into place with all the conditions and legal ramifications fully attended too.

During the conveyancing process you will receive various letters and phone calls advising you of what you need to know, and what you have to do next, as well as a number of documents to sign and return allowing your solicitor/conveyancer to go to next stage. It is vital that you respond to any requests promptly, because any delay on your part will delay the whole process. It is not unusual for a chain of home movers to be all lined up and ready to go only to discover that one of them is guilty of not responding to a request to act on something, and the whole process grinds to a halt. The pressure you will come under from all the parties in the chain is not always pleasant, and can often cause the chain to break.

In a sale or purchase there are three distinct stages:

Before exchange of contracts
Nothing is legally binding on either side and, generally speaking, there is no liability either way for a wasted survey, search fees and legal costs if the sale falls through.

Between exchange of contracts and completion
Both sellers and buyers are legally bound to complete on an agreed completion date.

On completion day
Monies change hands through the conveyancers, deeds are handed over, sellers move out and buyers move in.

Here's a breakdown of what your conveyancer will be doing:
He will usually request a cheque from you to cover the local search fee and send off for searches when contact has been made with the sellers' solicitor.

He will then obtain a purchase contract from the sellers' solicitors, with details of the property and its ownership.

He will sort out any pre-contract enquires and obtain copies of any existing guarantees, planning consents, etc.

He will obtain the sellers' fixtures and fittings list to see what they will be leaving in the property, and you will get a copy to check.

When your searches have been returned, and your mortgage offer has arrived, he will arrange for you to sign the contract and hand over your deposit for him to hold in readiness for "exchange".

When all the mortgage conditions have been complied with and the sellers are ready to proceed, a mutually acceptable completion date is agreed. Contracts can now be exchanged and the transfer deed and final searches effected.

Once this has been done your conveyancer can call down the mortgage advance from your lender and send you a final completion statement

On the completion day your conveyancer pays the required amount to the sellers' solicitors in exchange for the title deeds. You can now move into your new home. Your conveyancer will now register your name and mortgage at H.M. Land Registry and send the deeds to your lender for them to hold as security for their mortgage advance.

Legal fees for the cost of the conveyancing are payable to the solicitor or licensed conveyancer. The fee charged by a solicitor is based on his time and the costs of legal registrations and miscellaneous costs (known as disbursements) which he has to make regarding the property bought.

Solicitors' fees vary from practice to practice, although 1% of the purchase price is not an unusual figure. People selling an existing property have an additional charge to pay for the conveyancing of their existing property to a new buyer.

There are various conveyancing costs, which are usually itemised by the solicitor on completion. These costs include the following:

• local search, which reveals any matters affecting the property (such as road widening schemes, planning consents).
• land Registry fees, which are incurred in the transfer of ownership on the register from the old to the new owner
• Stamp duty, if applicable (see section below).
• Once a solicitor has the basic information, he can often give an approximate quotation as to costs.

Stamp duty is a 'purchase tax' levied by the Government and collected through the sale of stamps to be affixed to certain documents. It is charged when documents are legally completed in the UK.

What are the SDLT limits for residential property?

Please note if you are buying a property for more than £250,000 we may be able to save you thousands off of your Stamp Duty - See here --->>> Avoid Stamp Duty

In marginal situations, it may be possible to reduce payment of stamp tax. For example, assume a purchaser buys a house with curtains and carpets for £178,000, and the curtains and carpets have a value greater than £3,000. Then, if the purchaser buys the property, its fixtures and fittings, separate from the curtains and carpets, the purchase price of the property falls below £175,000 and there is no stamp duty. However, the sale documents would have to show this and the borrower may then only be able to borrow a reduced amount.

This is a fee charged by a mortgage lender where the amount borrowed exceeds a given percentage of the value of the property.

When a mortgage lender agrees to lend against the security of property, the lender's major consideration is to avoid losing money. In order to reduce this danger, mortgage providers take out insurance to cover loans where a high percentage of the purchase price is to be loaned.

Traditionally, if someone borrows up to 75% of the purchase price of a property, the provider does not seek further security than the property itself, as the likelihood of loss is minimal. Above this percentage and the provider is likely to insure against loss.

The following examples show how the higher lending charge is calculated; based on different percentage amounts borrowed:

Example one
Purchase price £200,000; mortgage of £148,000. £200,000 x 75% = £150,000. Since the mortgage required is less than this amount, insurance is not required.

Example two
Purchase price £200,000; mortgage of £160,000. £200,000 x 75% = £150,000. Since the mortgage required is 80% of the purchase price (i.e. £160,000 divided by £200,000 = 80%), insurance is required. The high percentage lending charge will be as follows: £160,000 less £150,000 = £10,000 @ 4% premium = £400 higher lending charge.

Example three
Purchase price £200,000; mortgage of £185,000. £200,000 x 75% = £150,000. Since the mortgage required is 92.5% of the purchase price (i.e. £185,000 divided by £200,000 = 92.5%), insurance is required. The high percentage lending charge will be as follows: £150,000 less £185,000 = £35,000 @ 6% premium = £2100 higher lending charge.

The high percentage lending charge premium is paid by the borrower, though it can often be added to the loan if the lender's criteria allows for this. In that case, it is important to add the value of the premium to the sum assured for any savings plan or term assurance selected.

Please Note: Not all lenders make the borrower pay the high percentage lending charge. Many lenders pay the high percentage lending charge premium themselves, and some will only ask the borrower to pay the higher lending charge for any borrowing over 90% of the value of the property even though they may take out a policy that protects for borrowing over 75% of the property value.

The lender pays the premium direct to the insurance company with whom it has arranged the cover, and receives protection from them on the amount of the loan over the 75% level in the event of the borrower defaulting..

By virtue of the Building Societies Act 1986, building societies are required to arrange a report and valuation of every property on which a new advance is made. Whilst lenders other than building societies are not legally required to arrange valuations, they all insist on them.

A survey fee is charged for such a valuation. The survey fee is, therefore, another initial cost and will usually accompany the mortgage application. The valuation offers some very real benefits to both the lender and the borrower in that the lender needs a professional opinion as to the market value and quality of the security for the loan.

The valuer, being a suitably qualified person, has a duty of care and a contractual liability to provide an accurate valuation. The subsequent ability of the lender to sue the valuer in the case of a negligent error strengthens this security.

The lender wants to know of any defects that may affect the property's marketability, a major reason why lenders insist on a valuation is to avoid fraud, with the valuer acting as the 'eyes' of the lender. The inspection may also reveal other aspects, such as undeclared occupants or a suspicious connection between the vendor and the purchaser.

The borrower is also concerned with the market valuation of the property and any major defects it may have. Some of the surveyor's findings may enable the purchaser to renegotiate the price.

The surveyor is either a staff valuer, working in the direct employ of the lender, or a panel valuer. Most lenders operate a panel system, whereby local valuation firms are requested to perform the survey.

There are three main types of survey available. These vary in depth of information and, therefore, in cost.

Basic Mortgage Valuation
A basic valuation costs the least of all surveys because they are the least detailed. Normally a mortgage lender will insist you have this survey because it gives them basic information about the value of the property. It will advise them about some basic conditions of the property (e.g. what type of construction it is, what type of roads service the property). This type of survey should cost around £100 - £500 depending on the property value.

Report and Valuation ( Homebuyers Report )
The RICS homebuyer report is in a standard format and is designed specifically as an economical survey and is a cost-effective way to minimise risk. The homebuyer report focuses on essentials: defects and problems which are urgent or significant and thus have an effect on the value of the property. The homebuyer report, unlike a building survey, provides not only a survey but also a Valuation as an integral part of the service.

This type of report is much more detailed than the basic mortgage valuation, which most people choose to commission, and is normally instructed by house/flat buyers for their own use giving them a direct link with their own Chartered Surveyor. The surveyor's main objectives in providing the service are to give guidance on value and to assist the prospective home buyer to:

• Make a reasoned and informed judgement on whether or not to proceed with the purchase.
• Assess at what price it would be reasonable to purchase the property.
• Be clear what decisions and actions should be taken before making an offer to purchase.

The surveyor will also give a professional opinion about the particular features of the property which affect its present value and may affect its future re-sale.The report format is standard, compact, and easy to understand. It covers the building inside and outside, the services and the site. It focuses on the defects and other problems which the surveyor judges to be urgent or significant. It also covers:

• General condition and particular features.
• Particular points which should be referred to your legal advisors.
• Other relevant considerations concerning, for example, safety, location or perhaps insurance.

Matters which are judged not to be significant are generally not included in the report but where necessary, the surveyor may also be able to provide some extra service which is considered outside the scope of the standard package - perhaps for a schedule of minor defects (for later discussion with a contractor).

Internally, the condition of service installations, such as wiring and drainage and central heating, will also be examined but not tested.

Structural survey
The Building Survey used to be called a Structural Survey and is the most detailed of the three reports. There is no standard form but all Surveyors have developed their own detailed report format. The Surveyor will examine and report on Chimney Pots and Stacks, the Roof Cover, Soffits and Fascias, Gutters and Downpipes and look at all External Walls to see if there is any current evidence of settlement or subsidence.

The surveyor will examine Windows and external Timbers and endeavour to identify a Damp Proof Course. He will lift Inspection Chambers to examine the Drain Runs, advising on the necessity or otherwise of a drains test if there is visual evidence within the inspection chamber or around it , or on the Building, of drainage problems.

The surveyor will also examine the Site, identifying any visually apparent problems with the Boundaries. He will also advise if he considers that Trees represent a threat to the stability of the Building. Inaccessible roof surfaces are examined from the ground with the aid of binoculars. Inside the property the Surveyor will go into the loft, if access is available, to inspect the structure of the Roof, the Insulation, any Water Installation and examine Chimney Stacks, checking if there is adequate support. The composition of Ceilings may be noted together with the condition of any wiring found within the loft.

The Surveyor will then examine the underside of the Ceilings and check for signs of movement which may indicate roof spread, and then inspect all Internal Walls to see if there are any signs of Settlement or Subsidence. The Surveyor may recommend immediate remedial action, or monitoring of cracks within internal and external walls.

A Damp Test will be carried out to accessible ground floor areas. This can give an indication of whether subfloor timbers, which are not usually inspected where there are fixed floorcoverings, or if floorboarding has not been lifted, are at risk from dry or wet rot problems.

The Surveyor will then inspect Timbers, Plumbing, Electrics and Heating. If there are obvious problems here he may recommend specialist reports. The report may culminate with a Schedule of Repairs on a separate page which you can hand to a Building Contractor to obtain a quotation for any works necessary before you exchange Contracts on the property.

The Building Survey can include a Valuation on the property, and a reinstatement value. The Surveyor will confirm exactly what is and what is not covered under a Building Survey by confirmation letter when you ask for a quotation.