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Other mortgage costs

As well as your mortgage payments, you will also need to budget for a deposit, arrangement fees and possibly also mortgage protection and a mortgage indemnity guarantee.

Deposits and mortgages

When you take out a mortgage to buy a home, most mortgage lenders won't lend you the full price of the property. Many won't lend more than 90 or 95% of the value of the property or of the purchase price, depending on which is lower. If you need to borrow 90% or more, you may have to take out mortgage indemnity guarantee insurance.

Remember the 'value' is what the lender's valuer thinks the property is worth, and this may be less than the price you actually pay. For example, if you are bidding £105,000 for a property worth £100,000 and your lender will only lend you 90% of the value (£90,000), you'll need to come up with £15,000 for a deposit.

Read the page on how much can I borrow to find out more.

Mortgage arrangement fees

When you take out a mortgage, you will usually have to pay an arrangement fee to the mortgage lender. This will probably be around £200 to £300, but always ask your lender beforehand. You may be able to roll this fee into the total amount of the mortgage, but this means you will have to pay interest, so will be more expensive in the long run.

If a broker arranges your mortgage, you may also have to pay an arrangement fee to them.

Mortgage protection

You may also need to take out insurance in case you are unable to pay your mortgage.

  • Mortgage protection insurance - If you have a partner or a family you may also want to take out mortgage protection insurance or life cover, which would pay off the mortgage if you died. This may also include critical illness cover, which pays out a lump sum if you are diagnosed with a serious illness such as cancer, heart disease or stroke.
  • Accident, sickness and unemployment insurance - If you do not have any savings, you may want to take out accident, sickness and unemployment insurance, which would pay the mortgage if you were to fall ill or get made redundant.

Mortgage indemnity guarantee

A mortgage indemnity guarantee is an insurance policy which covers the lender if you default on the loan. It is sometimes called a mortgage insurance premium. If you are borrowing 90% or more of the value of the property you are buying, the lender may insist that you take out a mortgage indemnity guarantee. This will be a one-off payment that could amount to several thousand pounds. Some mortgage lenders will let you add the cost to your mortgage, but try to avoid this if you can as you'll then have to pay interest on it.

Be aware that a mortgage indemnity guarantee doesn't offer you any protection - it's purely for the benefit of the lender. So, for example, if you default on your mortgage and the lender repossesses your home and sells it at a loss, the mortgage indemnity guarantee policy would cover the lender for any shortfall and then pursue you for the money.

If you have a CAT mortgage, you will not be asked to pay a separate mortgage indemnity guarantee.

Buildings insurance

Your mortgage lender will also require you to take out buildings insurance to cover any loss or damage to the structure and fittings of your home. Some mortgage packages may require you to take out the lender's own buildings insurance, but if this is not a condition of your mortgage, it will usually be cheaper to shop around.

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The important points

  • If you need to borrow 90% or more of the value of a property you might have to take out mortgage indemnity guarantee insurance.
  • Mortgage indemnity insurance helps your lender not lose money but if it pays out, the lender gets their money and the borrower is pursued for this money by the insurer.
  • You might need to pay an arrangement fee to your mortgage lender when you take out your mortgage and also to a mortgage broker if you use one.
  • Your mortgage lender will require you to take out buildings insurance as part of the terms of the mortgage.

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