Mortgage Types
Mortgage costs vary depending on the lender, the mortgage type being applied for, the total amount being borrowed and the amount you are borrowing as a percentage of the value of your home.

The additional costs charged by mortgage lenders can usually be added to the loan. However, this means you will end up paying interest on the additional costs over the full period of the mortgage, so it is best to pay the fees up front where possible.

Some fees, such as arrangement fees, usually accompany the more competitive mortgage products. When choosing a mortgage you will need to weigh up the benefits of the competitive interest rates against any additional costs that may be charged.

Keep an eye out for lenders who will reimburse you for one or more of the costs below on successful completion of the mortgage.

Unfortunately, some lenders will use different terminology to the typical terms used below. If you are unsure what a lender's fee relates to then ask them.

Below is a list of the mortgage costs you should always check when choosing a mortgage. This list relates to mortgage costs only. There are of course many other costs involved in moving or buying a new home, including legal costs, removal costs, estate agent's commission (for sellers) etc.

Arrangement Fee

Also referred to as the administration fee, the arrangement fee is charged to cover the lender's cost of setting up the mortgage. It is payable on completion of the mortgage and is usually charged when applying for a fixed, discount, capped or cash back mortgage. Arrangement fees are typically between 100 and 300.

Application Fee

An application fee is less common and is charged for just applying for a mortgage. It is payable at the time the mortgage application is made.

According to mortgage lenders, the purpose of this fee is to restrict applications to serious applicants only. The more cynical would suggest that this fee is just another means by which lenders can increase their profits.

Mortgage Indemnity Guarantee (MIG) Premium

A mortgage indemnity guarantee is a type of insurance that protects the lender from you defaulting on any mortgage debt when the sale of the property is not enough to cover the amount owed. It is for the lender's benefit, not yours.

A MIG premium is usually levied when the amount you are borrowing as a percentage of the value of your home (the LTV percentage) is fairly high, typically greater than 90%. However, some lenders will charge a MIG premium even if the LTV is as low as 75%. Other lenders will not charge a MIG premium, regardless of the LTV percentage.

Valuation Fee

Lenders will usually require your new home to be valued in order to confirm that the property is worth at least the value of the amount to be borrowed. This helps to protect the lender in the event that you default on the mortgage.

Early Redemption Penalty

An early redemption penalty is a charge that is made if you switch your mortgage to another lender within a predefined period. The charge can be as much as the value of six months mortgage repayments.

The period over which the early redemption penalty applies may be for the fixed, discounted or capped period only or may apply for several years afterwards, with penalties reducing as each year passes.

You should be aware that if you opt for a mortgage that has an early redemption penalty period that extends beyond the fixed, discounted or capped period you could be trapped in that lender's standard variable rate for a number of years, and that rate may be uncompetitive.

Remortgaging is the act of moving your mortgage to a new lender or changing to a new mortgage with your current lender, without moving home.

The full range of mortgage types are available for remortgaging, including variable, fixed rate, discount, capped and flexible mortgages. Those mortgages targeted at the first time buyer will not be available to those wanting to remortgage.

A common reason for remortgaging is to take advantage of the fierce competition in the mortgage market and obtain a more competitive interest rate. Mortgage lenders are so keen to get your business that they will often offer deals that result in them losing money in the short term just to get you on board as a new customer. They then aim to make a profit from you over the long term.

Some of the more common reasons for remortgaging include:

  • to get a better mortgage rate in order to reduce monthly outgoings
  • to consolidate debt, such as outstanding credit card balances
  • to meet home improvement costs, such as a new extension
  • to finance a business loan

Before you decide whether a remortgage is the right way forward, you should take into account a number of potential costs that you may incur as a result of remortgaging.

  • Legal Fees
  • Valuation Fees
  • Arrangement Fees
  • Solicitor Fees
  • Early Redemption Penalties
  • Mortgage Indemnity Guarantee

The good news is that no stamp duty is payable on remortgages.

Shown below is a few samples of the best type of mortgages, that are on the market in the UK. Please read on to get an idea of what mortgage will suite you.

  • Fixed
  • Capped
  • Discounted Variable
  • Variable Rates
  • Tracker
  • Cash back

Fixed Rates

With a fixed rate mortgage the monthly repayment amount is fixed for a specified period. The fixed rate remains constant irrespective of changes to the Bank of England's base rate or the lender's standard variable rate.

The fixed rate period typically lasts for two to five years, although it can be longer. At the end of the fixed rate period the interest rate reverts to the lender's standard variable rate. An early redemption penalty will apply should you wish to cancel your mortgage before the end of the fixed period.

Furthermore, many fixed rate mortgages 'tie you in' for longer periods. This is because an early redemption penalty is charged if you cancel your mortgage within a set number of years following the end of the fixed rate period.

Advantages

It is easier to budget for your mortgage repayments as you will know exactly how much you will be paying over the fixed rate period.
You can usually benefit from a lower interest rate in the first few years, freeing up money for furnishings, carpets or whatever else you want.
You are protected from any increases in the Bank of England's base rate.


Disadvantages

Early redemption penalties will almost certainly apply, which may also extend beyond the end of the fixed rate period. This means you will be unable to change your mortgage during the 'early redemption penalty period' without paying a fee, which may be up to the value of six months mortgage repayments.

Consequently:
During the fixed rate period you may miss out on a more competitive interest rate if the lender's standard variable rate drops to less than the fixed rate.
You may be trapped in an uncompetitive rate once the interest rate reverts to the lender's standard variable rate.
You will normally have to pay an application fee when arranging your fixed rate mortgage.

Capped Mortgages

A capped mortgage ensures that the interest rate does not rise above a predefined threshold, the capped rate. The interest rate is usually the same as the lender's standard variable rate, but will not rise above the capped rate.

Capped rate mortgages are also available in conjunction with some discount mortgages.

Advantages

You can benefit from a fall in the Bank of England's base rate that leads to a subsequent fall in your lender's standard variable rate. At the same time you remove the risk of the interest rate increasing beyond a known level, allowing you to budget more easily.


Disadvantages

Early redemption penalties will almost certainly apply, which may also extend beyond the end of the discounted period. This means you will be unable to change your mortgage during the 'early redemption penalty period' without paying a fee, which may be up to the value of six months mortgage repayments. So, you may be trapped in an uncompetitive rate once the interest rate reverts to the lender's standard variable rate. You will normally have to pay an application fee when arranging your capped mortgage.

Discounted Variable Rates

A discount mortgage has an interest rate where a discount is applied to the lender's standard variable rate for a set period, usually from six months to several years. As the lender's standard variable rate moves up and down, so the discounted rate moves up and down by the same amount, with the differential between the two remaining the same.

Advantages

  • You can benefit from a lower interest rate in the first few years, freeing up money for furnishings, carpets or whatever else you want.
     
  • You can benefit from a fall in the Bank of England's base rate when it results in a subsequent fall in the lender's standard variable rate.

Disadvantages

  • Early redemption penalties will almost certainly apply, which may also extend beyond the end of the discounted period. This means you will be unable to change your mortgage during the 'early redemption penalty period' without paying a fee, which may be up to the value of six months mortgage repayments. So, you may be trapped in an uncompetitive rate once the interest rate reverts to the lender's standard variable rate.
  • You will normally have to pay an application fee when arranging your discount mortgage.
  • At the end of the discounted period your mortgage payments will suddenly increase as the mortgage reverts to the lender's standard variable rate.


Variable Rates

With a variable rate mortgage the monthly repayment amount is based on the lender's standard variable rate.

The lender's standard variable rate is based on the Bank of England's base rate and will consequently move up and down as the base rate moves up and down. Standard variable rates vary from lender to lender but are typically 2 to 4 percent above the base rate.

Advantages

  • You are able to change mortgage at any time without being penalised as there are no early redemption penalties.
  • You can benefit from a fall in the Bank of England's base rate that leads to a subsequent fall in your lender's standard variable rate.

Disadvantages

  • The Bank of England base rate can be unpredictable and can increase rapidly, resulting in an increase in your monthly payments.
  • It is less easy to budget as the interest rate can and will vary.
  • A fall in the base rate will not always result in an equivalent fall in the lender's standard variable rate.

Tracker

Tracker mortgages follow changes in the base rate, with a constant differential being maintained between the base rate and the mortgage interest rate.

A lender's standard variable rate will typically be around 1.5% above the base rate. In addition, a fall in the base rate will not always necessarily be followed by an equivalent fall in the standard variable rate. However, tracker mortgages tend to have a smaller difference above the base rate, down to around 0.75% or even lower, and they are guaranteed to rise and fall with the base rate.

This means if the base rate rises your monthly payments will rise. If the base rate falls your monthly payments will fall.

The period for which the tracker mortgage applies may be for a fixed term only, say 5 years, after which time the interest rate will revert to the lender's standard variable rate. Tracker mortgages are also available that persist for the full term of the mortgage.

Some mortgage lenders will offer different tracker rates depending on the amount you are borrowing as a percentage of the value of your home (LTV - Loan to Value). For example, 0.75% above the base rate may be offered for a mortgage with an LTV of 90%. Alternatively, 1.5% above the base rate may be offered for a mortgage with an LTV of 95%.

A tracker mortgage may be offered in conjunction with a discount offer. For example, 0.5% above the base rate may be offered for the first 2 years, rising to 0.75% above the base rate after the discount period.

Advantages
 

  • The interest rate payable will usually be lower than the lender's standard variable rate.
  • You can benefit from all drops in the Bank of England's base rate as they will always lead to an equivalent fall in your tracker mortgage's interest rate.


Disadvantages

  • Early redemption penalties may apply which could extend beyond the end of the discounted period. This means you will be unable to change your mortgage
  • during the 'early redemption penalty period' without paying a fee, which may be up to the value of six months mortgage repayments.
  • The Bank of England base rate can be unpredictable and can increase rapidly, resulting in an increase in your monthly payment
  • It is less easy to budget as the interest rate can and will vary.

Cash back

A Cash back mortgage is one where a lump sum is paid to the mortgage applicant on completion of the mortgage. It is a scheme that is offered alongside other mortgage products. The cash can be used as you wish.

Advantages

  • The additional cash can be useful at a time when you may have little spare cash. The money can be used to pay solicitor's fees, buy furnishings, carpets etc. You could even put the money into a savings account and use it to assist in making mortgage repayments in the first few months or years.

Disadvantages

  • Early redemption penalties will almost certainly apply. This means you will be unable to change your mortgage during the 'early redemption penalty period' without paying back the lump sum received, or paying a fee, which may be up to the value of six months mortgage repayments. Consequently, you may end up being trapped in a mortgage with an uncompetitive rate.
     
  • You may have to pay an application fee when arranging your Cash back mortgage.