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Easy Guide to Understanding Mortgage Charges – Part 1

Apart from the capital credit and added interest you will incur from a mortgage loan provider, there are other fees that can come as a nasty shock if you haven’t budgeted for them. The following guide clarifies the charges involved when taking out a mortgage to help you find the best deal possible.

Insurance
It is compulsory to take out adequate Buildings and Contents Insurance when applying for a mortgage loan. Your lender will insist on this to secure the sum you owe them – they will check run a check on whether your insurance is suitable for the property you want to buy or refinance and might even charge a fee for doing so if you choose a policy other than the ones they recommend or sell. Previously loan providers made taking out their own insurance mandatory when offering highly competitive mortgage packages, but this is now less prevalent. The Buildings Policy relates to the structure of your flat or house and will cover you against such unforeseen events as fire, flooding and storm damage. Contents insurance will cover your interior possessions such as furniture, carpets and home entertainment system.

Early Repayment Charge
The Early Repayment Charge (ERC), otherwise known as a Redemption Penalty, is often applied to mortgages by lenders to deter people from paying off their mortgage early or refinancing with a competitor. The reason for this, apart from obviously not wanting to lose customers, is that due to the mortgage market being very competitive many providers sell their products as ‘loss leaders’. This means the lender will only start to make a profit off their loan to you after a number of years, so they will lose out if you pay it back early. The fixed period that applies to an Early Repayment Charge varies and can amount to a significant sum – six months interest is very common. Be sure to take this into consideration when deciding on which loan provider and mortgage product to go for. While mortgage products which don’t charge this fee might not be as competitively priced as those that do, you could end up saving a packet later by being free to take advantage of great remortgage deals as they become available in the future. Also be aware however that while some lenders might not apply a Redemption Penalty, they might then bump up other hidden fees, so it’s a good idea to read the fine print thoroughly.

Overhang
An overhang is an Early Repayment Charge which applies for longer than the discounted or fixed period of your mortgage. For example, you could have a 4 year special rate which has a 6 year ERC. Ideally you would want your Redemption Penalty to be terminated on or before the date that your special rate expires. This will allow you to opt for a remortgage once your benefit period is over, which amounts to a better deal that offers a fresh discount term rather than having to pay your lenders Standard Variable Rate of interest. It must be noted however that you might still have to pay other fees if you choose to remortgage with another lender, such as legal and sealing fees.
Whether you’re looking to finance your first home or are interested in a remortgage, it’s important to carefully consider your particular needs and future plans to choose the package that will suit you best. This will also help clarify the added loan charges you find acceptable. The Easy Guide to Understanding Mortgage Charges Part 2 will further discuss the fees you’ll face when shopping around for a loan provider.

Sean Raston is an economics student and expert in the remortgage process.