It’s no secret that there are a lot of expenses to consider when applying for a mortgage.
There are booking fees, arrangement fees, valuation fees, legal costs… the list goes on. These all need to be budgeted for in order to stay on top of your finances, but often overlooked are the fees that apply once the mortgage has actually been approved and gone through. References to these expenses are usually nestled comfortably in the darkest corner of the contract, hoping to be ignored, but don’t let that stop you! Below are some often unexpected costs that come into effect after your mortgage has gone through.
Annual percentage rate
One of the better-known expenses (as it comes up in mortgage and credit card adverts all the time) is the Annual Percentage Rate (APR), but understanding it is a different matter. The APR is the average interest charged on your loan calculated for the entire duration of your mortgage. For instance, if your 25-year mortgage offers the first two years at a fixed-rate of 1.65%, but then switches to a Standard Variable Rate (SVR) of 4.49% for the remainder of your contract, then the APR would be 4.2% for the 25 years. But it’s unlikely that you’d pay that amount because you would presumably have moved your mortgage to one with a better deal once you had built some equity. APRs tend to make several assumptions about your mortgage, namely that you won’t borrow more money and that you’ll hold your mortgage for the full duration, so they aren’t especially reliable. Calculating an accurate APR is near impossible, and a lower APR doesn’t always mean that you’ll be getting the best deal. A lender might offer ‘discount’ rates for a period of time, but shower their client with additional fees. If you speak to an experienced broker, they will be able to help you calculate a more accurate idea of what to expect to pay, with all the fees and varying interest rates in mind.
Early repayment charges
Mortgage companies are well aware of the fact that a few years into the arrangement, you will be better positioned to get a better deal for the rest of your mortgage. To attempt to control this, they require an Early Repayment Charge (ERC) to be included in your contract. This means that if you decide to repay your mortgage early, they will charge you a percentage fee to do so. The fee is added to your redemption figure, given to you at the end of the mortgage. Make sure you’re aware of what percentage of your loan you will need to pay back before you confirm your mortgage, and check if that percentage is of the total loan amount or the figure left to pay. Lenders are obliged to clearly state any details of fees due to early repayment. An ERC of several thousand pounds could be a serious roadblock to paying back your loan, especially if you aren’t prepared for it. There are ways to avoid ERCs, however. SVR mortgages tend not to have an ERC, and these are the types of mortgage you can expect to be put on once your introductory fixed, tracker, or discounted deal runs out. On the other hand, if you were to try to repay your mortgage too early – say, within the first few years of the contract – you could be lumped with not only the ERC but also any incentives you were offered by the lender, such as legal fees or cashback.
Lastly, when you close your mortgage account, there is the exit fee. It is applied when you switch your mortgage to another lender, but can also be applied when you finish paying off your mortgage. In the latter case, lenders will usually refer to it as a ‘mortgage completion fee’ or another such title. Either way, it could cost from £50 up to £200 or above. Hopefully, this blog will mean you’re better prepared to choose your mortgage or remortgage! If you want to know more about unexpected fees during the mortgage application process, check out our blog, The Hidden Costs of Buying a House. However, if you have any more questions or need any assistance we’d be glad to help, so feel free to contact us!