Most mortgage buyers feel like celebrating when they close a low interest rate deal. Securing a low rate of interest is everyone’s prime objective but let’s hope they weren’t too blinkered.

The problem is that in many cases, fees and charges are often poorly explained, or kept out of immediate view, and these can add up to thousands of extra pounds over the period of the mortgage.

Unwary homeowners can easily opt for a very plausible rate of interest only to find out a few years later when they want to re-mortgage for a better deal, that they’re faced with retaliatory early redemption fees. Other will find that, along with their bargain cheap rate of interest comes a hefty arrangement fee.

The mortgage industry has found that low rates of headline interest pack the punters in. So they put a lot of energy into devising ancillary and less obvious ways of parting you from your money. Here are some of the area’s you need to check out:

Charging interest at the month end
Some lenders like the Stroud & Swindon and the Skipton building societies, charge interest up to the end of the month in which you redeem your mortgage. This can mean that if you later decide to switch that mortgage, you can effectively end up paying interest twice for the month in which you switch.

For example, if you switched on the 1st of the month you will be charged interest by you old lender up to the end of that month – and at the same time your new lender will also have started charging you interest from the 1st, your switch over date. This means that you will end up paying double interest for that month. Sneaky eh!

The way around this is to plan the switch to complete just before the month end. That way you’ll minimise the double payment. The trick is to be aware of the problem and plan for it.

Annual Interest Calculations
Another sneaky one! Here the lender charges you interest based on what you owed at the commencement of the year. This means that you end paying interest on money you’ve already repaid months ago. Who are the guilty ones here? Well fortunately there are only a handful, the most well known of them being the Portman Building Society and the West Bromwich Building Society.

What you really want is interest to be calculated daily. This means that all your repayments are credited immediately and you end up paying interest on exactly what you owe.

Arrangement Fees
Where fixed rate arrangement fees are charged they tend to be in the £399 to £650 range but you can end up paying much more if the fees is calculated as a percentage of the sum you’ve borrowed.

Some lenders such as the Woolwich, the Northern Rock and the Nationwide offer borrowers the option to pay an arrangement fee and pick up their headline interest rate or refuse to pay the fee, in which case they pay a higher interest rate.

For example, the Nationwide’s current 10 year fixed rate is 4.88% but attracts an arrangement fee of £399; their fee free version of the same product charges 5.28%. This means that if you go fee free, the monthly payments for a £125,000 mortgage work out at £751.28 whereas if you paid the fee and added it to your mortgage the monthly payment would be £724.90. Over the full ten years of the 10-year fix, you’ll end up paying £3,165.60 extra for the privilege of going fee free.

As a general guideline, the longer you expect to stay with a mortgage, the less it’s likely that a fee free option will work out cheapest. So, always ensure that you or your mortgage adviser works out what’s the cheapest way to go.

Exit Fees
These are the charges levied by almost every lender when you pay off a mortgage or switch.

In theory they are meant to reflect the administration cost of the redemption process but if this is the case why do these charges vary from Britannia’s £35 up to £295 with the Alliance and Leicester? The Financial Services Authority is currently investigating the matter.

Extended tie-ins
Beware of deals that tie you in with big penalties to remain with the lender for several years after the deal rate ends and which then move you to an uncompetitive rate of interest.

For example, the Portman currently has a fixed rate deal running to May 2008 at just 1.79%; but after May 2008 you have to stay with the same mortgage for another 4 years and on the society’s standard variable rate. And if you want to jump ship before May 2012? Then if you moved before May 2009 you’d be charged an exist fee equal to 7% of the outstanding mortgage, 6% in the following year, then 4% the next year and 2% during the final lock in year.

Higher Lending Charge (previously known as a Mortgage Indemnity Guarantee or MIG)
If you can’t raise a 10% deposit, some lenders will require you to pay a Higher Lending Charge (HLC). This is in effect an insurance policy which protects the lender if you default on the mortgage and the proceeds of the sale of the property fail to repay the outstanding balance on your mortgage.

But whilst you pay the one off up front premium, you never benefit from it. If things get nasty and the lender repossesses your property and sells it at auction for say £100,000 when you still owed the lender £110,000, the insurance policy would pay £10,000 to your lender. But that will not help you - you would still owe your lender £10,000 and they will take action against you to recover the £10,000 from you.

We doubt the justification for HLC’s especially since so many lenders have now ceased using them. A higher loan-to-value mortgage may attract a higher interest rate but you’re still likely to be better off accepting that rather than paying a HLC. If it applies to you, get you mortgage adviser to check it out.

Lender that do not charge HLC’s include Cheltenham & Gloucester, the Nationwide, Northern Rock, the Woolwich (which is now part of Barclays Bank) and HSBC.

Fees from Mortgage Advisers
With thousands of mortgages on the market and with so many aspects to watch out for, it makes sense to use a mortgage broker. After all few purchases you make will be bigger or more important than your home!

Your broker will match your requirements and personal circumstances to a choice of mortgage alternatives. They’ll then talk through with you the best options available and make the various calculations to evaluate them. It’s then up to you to decide.

The point is that nothing is free these days - including this service! Some brokers will charge you a percentage of the mortgage and some charge you a flat fee. Others elect to receive fees from the lender rather than charge you a fee. Be sure you understand how your broker will be charging before you appoint them to work for you.

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