Summary

If you're planning a mortgage, be aware of the extra charges that can creep in. Here we try to explain some of the jargon which you'll come across.

Seeking a mortgage? Check out the hidden costs.

Author: Michael Challiner

If you're planning a mortgage, watch out for the hidden and unexpected costs.

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Life Insurance News

The whole business is an absolute maze, and where you may feel you have a good deal as regards a low interest rate, there may be other charges which will tip the balance overall. Tread carefully and check out the fine points.

Here we aim to unveil some of the mysteries of:-

Arrangement Fees.
Exit Fees.
Extended tie-ins
Mortgage Advisers Fees
Higher Lending Charge
Annual Interest Calculations
Interest charged at month end.

All these are in relationship to simply organizing a mortgage at a reasonable rate. Confused? Then let's try to clarify things.

Arrangement fees - There are a variety of ways in which the cost of arranging the mortgage is calculated. It is possible to obtain a fee-free deal, but you need to be aware of the options on offer. Some mortgage lenders, for example the Nationwide, Woolwich and Northern Rock, offer a lower rate in return for the payment of an arrangement fee.

At the present time, for example, Nationwide's 10 year fixed rate is 4.88%. The arrangement fee to achieve this rate is £399. Their alternative fee free option is charged at 5.28%. On a £125,000 mortgage you would pay £724.90 (assuming the fee was added to the mortgage) per month. Take the fee free choice and the repayment will be higher at £751.28 per month. That's over £3000 extra paid out over the life of the mortgage.

If fees are calculated as a percentage of the sum loaned the result could be a much higher repayment.

If you expect to stay with the mortgage for the longer term, it's unlikely that the fee free option is going to be the most economical.

Exit fees - If you pay off your mortgage or transfer to another lender you will normally be charged for this. The Financial Services Authority is investigating these charges at present as they can vary between the £35 charged by Britannia, rising to £295 with the Alliance and Leicester. As the charge is meant to be in relation to the cost of administering the redemption process it will be interesting to learn the outcome of the investigation.

Extended tie-ins - As an example, if you applied for a mortgage with the Portman at the present time there is a fixed rate on offer at 1.79%; an excellent rate BUT it only runs until May 2008 at this rate. After that date you have to switch to their standard variable rate for the next four years. If you decide to move mortgages before that time is up, there would be an exit fee to pay which equates to 7% of the balance of mortgage in the first year, reducing to 6%, (2 nd Year), 4% (3 rd year) and in the last year 2%.

Higher Lending Charge - Should you have a problem in raising the initial 10% deposit on your property, and need to borrow this too, this is where the higher lending charge comes in. Effectively this is an insurance policy, designed to protect the lender if you are unable to continue with payments on your mortgage and there are insufficient funds from the sale of the property to cover the balance outstanding on your mortgage.

Unfortunately if your property has to be repossessed and there is an overall shortfall, the lender would be paid out of the proceeds, leaving you with a debt owing to the mortgage company. They would certainly take action to recover this money.

The Nationwide, Northern Rock, Cheltenham and Gloucester, HSBC and the Woolwich are amongst lenders who do not apply the higher lending charge.

We wouldn't recommend the higher lending charge and many lenders have stopped offering them. The alternative is a higher loan-to-value mortgage with a higher interest rate but we feel it's preferable to the higher lending charge.

This charge used to be known as a Mortgage Indemnity Guarantee.

Charging interest at the month end - Beware of this one! If you're switching your mortgage, you may get caught in the trap of paying two lots of interest in the month in which the switch is carried out. Some building societies, the Stroud and Swindon and the Skipton being examples, calculate interest to the end of the month. Other lenders may charge from the beginning of the month.

Click here for part 2

Did you Know?
When looking for a cheap mortgage, or cheap loans for that matter, you're sure to face the decision between choosing a low interest rate mortgage or a higher rate mortgage but with no, or very low, up front costs.

We've all seen mortgages or loans with incredibly low interest rates advertised in the national press and on the Internet. Experience shows that it's a low interest rate that pulls in the borrowers so lenders bust a gut to publicise low headline rates. The difficulty is that these super low rates force the lenders to recover some of their profits in other ways. A high arrangement fee is a common solution and expensive exit charges are another.

An arrangement fee is charged to allegedly cover the cost of administering the mortgage application and reserving the advance. Normally these fees can be added to the mortgage but some lenders require them to be paid in advance. And they can vary enormously, not just between lenders but even between the mortgages offered by the same lender. So keep your eyes skinned!

Did you know?
If you can't get home insurance , beware - the Royal Institution of Chartered Surveyors warns that value of your house could fall by 80%. And it's a high flood risk that is most likely to make your house uninsurable. According to a recent report, 6.5 million homes are already at risk from flooding and 1.5 million homes are in areas at high risk. Furthermore, if global warming continues, by 2030 this 1.5 million figure could double.

Did you Know?

Early methods of transferring or distributing insurance risk were practiced by Chinese and Babylonian traders as long ago as the 2 nd and 3rd millennia BC. Chinese merchants traveling treacherous rivers would redistribute their stock across many boats to limit the loss due to any single boat sinking. The Babylonians devised a system which was recorded in the Code of Hammurabi, circa 1750 BC and was used by early Mediterranean sea traders. If a trader received a loan to fund his shipment, he paid the lender an extra sum in exchange for a guarantee that the lender would cancel the loan should the shipment be accidentally destroyed or stolen.

Did you Know?
According to the Council of Mortgage Lenders, over 200,000 homebuyers in the London area took out an interest-only mortgage last year without having a repayment vehicle in place. Of these 60,900 were first-time buyers.

There are no figures available for the total number of homebuyers with interest-only mortgages. However, the market share for new interest-only mortgages have been running at between 10 to 20% over the past 10 years.

Mortgage brokers have been arranging more than half of these interest only best mortgages . So when these mortgages reach maturity, if the mortgage holder hasn't enough capital to repay the debt, many of these brokers could be up for claims of miss-selling.