Mortgage fees: do you know what you are paying?

A mortgage is highly likely to be the biggest financial commitment you make during your lifetime. You borrow hundreds of thousands of pounds, secured against the roof over your head with the promise of repaying that debt over a couple of decades.

Yet, research has found time and time again that most of us don’t fully understand the ins and outs of our mortgage.

One key area that causes masses of confusion is the fees that we pay on our mortgages. There are a whole host of additional charges added to most mortgage bills. As these have a wide variety of names in the past it has been hard for consumers to understand how these fees affect how much they pay and make it nearly impossible to accurately compare the total cost of one mortgage with another.

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For example, a two-year fixed rate mortgage at 90 per cent loan-to-value from Tesco Bank has an interest rate of 2.29 per cent. But, there are six additional fees and charges on top of that including: booking fee of £195, product fee of £1,300, valuation fee (on a £100k to £200k loan) of £275, £25 to transfer funds, redemption administration fee of £90 and early repayment charges of two per cent or three per cent depending on how early you want to repay.

It’s all incredibly confusing and Which? have been campaigning about it. As a result the Council of Mortgage Lenders (CML) and Which? have come together to make lenders simplify their mortgage charges.

“Thousands of people supported our call to end confusion around the cost of mortgages,” says Which? executive director, Richard Lloyd.

“We’re pleased that our work with the CML has resulted in simplified fees and charges. This new approach should make it much easier for people to compare mortgage fees. We hope that all mortgage providers will make these changes as soon as possible.”

The changes mean each lender will list their mortgage fees in the same order, using the same standard descriptions so that we can all compare mortgages more easily.

The fees listed will include application, valuation and legal fees, as well as early repayment charges. Any lender charging fees that don’t fit into this standard tariff will have to make these additional charges clear.

“We very much hope that the new tariff and standard terminology will make it demonstrably easier to understand and compare mortgage costs,” says CML director general Paul Smee.

What the fees mean

Application fee: combines a number of fees including the booking fee and arrangement or product fee

Booking fee: a non-refundable amount you pay when you apply for a mortgage.

Arrangement or product fee: often a sizeable sum of up to £2,000 that can be added to your mortgage and repaid over the term. But, doing so can substantially increase your mortgage costs. Often a very low-rate mortgage can have a large arrangement fee that cancels out the benefit of the low interest rate.

Valuation and legal fees: what the lender charges for sending someone out to value the property you want the mortgage on and any fees the lender incurs from its own solicitors while it assess the property.

Early repayment charges: a fine you pay if you decide to repay the mortgage early. Usually it is levied if you repay the mortgage before the end of the initial mortgage deal. It is typically one per cent to five per cent of the total debt so can be a hefty penalty.

Administration fees: also known as exit fees these are a final sting in the tail when you finish paying your mortgage. Despite paying the lender thousands of pounds in interest it will charge you £100-£300 to cover the costs of setting up, maintaining and closing your mortgage.