Mortgage fees and insurance
When you take out a mortgage, some lenders will charge an arrangement fee and may insist that you pay for a mortgage indemnity guarantee. You will also need to pay for buildings insurance.
You may want to protect yourself further by buying contents insurance and insurance to pay your mortgage if you die or are unable to work.
Mortgage arrangement fees
Most mortgage lenders charge arrangement or application fees for organising your mortgage, usually between £200 and £300. If you get a financial adviser to arrange your mortgage, you may also have to pay a separate fee. On the other hand, your financial adviser may get a commission from your lender.
Mortgage indemnity guarantees
Many lenders will ask you to pay for a mortgage indemnity guarantee if you need to borrow a large percentage of the value of your home. A mortgage indemnity guarantee protects your lender's investment - not yours. If the lender claims on the insurance, the insurance company will claim the money back from you. It can cost from £100 to £1000 or more. It may be worth shopping around to find a lender who doesn't insist that you pay for this type of insurance, or who charges a lower rate.
Most lenders will make you pay for this type of insurance if you borrow more than 90% of the value of the property.
Mortgage protection payment insurance (MPPI)
Mortgage protection payment insurance can protect you from problems paying your mortgage if you lose your income. It will usually pay your mortgage if you:
- are made redundant;
- have an accident;
- develop serious health problems.
The type of cover depends on your circumstances. Many policies are not available if you:
- are self-employed;
- work part-time;
- are a contract worker.
Mortgage lenders don't usually insist you take out mortgage payment protection insurance. However, you may want to consider it if you are worried about your health or your job security. Most policies will not pay any money for the first three months after you stop working. Check the terms before you buy.
You can also take out life insurance to pay off your mortgage in the event of your death. This would prevent your household from the risk of eviction. Some lenders insist that you have life insurance, but it's not a legal requirement.
The costs involved normally depend on your age, personal circumstances and general health. If you have an interest only mortgage (such as an endowment, ISA or pension mortgage), it will probably include life insurance. Check your policy to see if this is the case.
You usually become responsible for buildings insurance when you exchange contracts. This will protect you and your lender from the cost of repairing or rebuilding your home if there is a serious accident such as a fire.
Buildings insurance includes the cost of:
- removal of debris;
- architect fees;
- legal fees.
It doesn't cover general repairs and maintenance, or your personal belongings.
Most people who buy a flat are leaseholders. The freeholder usually insures the whole building. You will have to pay your share of the bill. It is usually included in your service charge. If you are not a leaseholder you will have to arrange building insurance yourself.
Contents insurance covers the value of the contents of your home if these are damaged, destroyed or stolen. It covers:
- household items;
- personal belongings.
Contents insurance isn't a legal requirement, but it is very helpful if you need to replace expensive items.
It is usually possible to take out buildings and contents insurance with the same insurer, which may work out cheaper. Your mortgage lender may be able to offer an insurance package which is included in your monthly mortgage payment. You can also buy insurance separately. Different companies offer different deals.
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