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Your Money > Mortgages Articles > 10 mortgage pitfalls...
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By Sarah Modlock
With the Bank of England base rate currently as low as it's likely to go, the only way is up for mortgage interest. So whether your planning to cap or fix (but probably not track) or are a first time buyer, tough economic times mean it's even more crucial to avoid mortgage man-traps which will cost you money. Here are 10 to steer clear of.... 1. Early repayment charges Most mortgage deals have some kind of early repayment penalty – the fee you must pay the lender if you decide to switch your mortgage early. Typically, you have to pay your existing lender a number of months' interest if you repay your home loan before the end of the deal period. If you received cashback when you took out your mortgage, you will be expected to repay some, if not all, of this money if you move your mortgage elsewhere. It is important to work out the redemption costs carefully because even if you move to a new lower rate, the various fees involved may make the cost of moving mortgages actually equal more than the savings you make on the new rate. 2. Extended redemption penalties Some mortgages also have what is called an extended redemption tie-in (or 'early repayment overhang') which means you must stay with the lender for a certain period – usually several years – after the fixed or capped rate period has expired. This is often where the lender can make its money. Any savings made by the borrower during the fixed rate period could be negated by the rate s/he must pay for the remaining years of the deal, which may not be very competitive. And as with all penalty periods, getting out of the deal altogether will come at a price. Ray Boulger, the technical director at mortgage broker Charcol warns: "Borrowers should check very carefully the total cost of any mortgage - and check they are not liable for any lock-in fees. Many of the best deals do not leave borrowers liable for these charges." 3. Exit fees If you spotted this in the small print you could easily assume it is the same as an early repayment charge. But the reality is that some lenders apply yet more fees when you leave them, supposedly to cover administrative costs. Traditionally these fees have been around £50 to £100, but some lenders take advantage of small print stating the fees are variable and ratchet them up to £200 or more. Many people have found it is possible to beat the fees by complaining. Louise Cuming, head of mortgages at price comparison website Moneysupermarket.com, said: "If borrowers are unhappy with the exit fees imposed by their lender, it is important to challenge them directly with all the relevant documentation, if it refuses to reduce the fee then the borrower should write directly to the FSA." 4. Mortgage arrangement fees If lenders can slap one of these on you, they will. And they are often found on the best deals so don't assume a nice low interest rate means the lender is your best friend. You may be asked to pay the fee when you make the application. This almost certainly means the fee is non-refundable, so if the lender declines to give you a mortgage, they keep your cash. Other lenders will agree to lump the fee into your mortgage which means you will be paying interest on it. If it is not clear, make sure you ask whether fees apply, how much they will be, when they are due and whether they are refundable. Always negotiate - try to get them waived or heavily discounted. The same applies if you go through a mortgage broker. If they are getting commission from the mortgage company then waiving the arrangement fee is the least they can do for you. 5 . Higher lending charges As if homebuying was not expensive enough, coughing up anything short of a 10% deposit on your chosen property could mean you are stung by a higher lender charge, formerly known as a 'mortgage indemnity guarantee' or 'MIG'. If a lender is allowing you to borrow more than around 90% of the value of the property, they are likely to require a MIG. Put simply, this is a single-premium insurance policy designed to protect the lender - not you - if the property has to be repossessed and is sold for less than the outstanding mortgage. The privilege of protecting the lender does not come cheap. On a £190,000 loan for a £200,000 property, expect to pay anything from 2,500 to more than 3,500. And if you thought that was a cheek, bear in mind that adding the cost of the HLC to the mortgage will mean you pay interest on that amount too.
6. Stepped interest rates If your new mortgage has a nice low rate, check carefully that this sunny start will not become cloudy. Stepped rates start low and gradually increase over the term, although some work the other way. In both cases you need to shop around as there is a good chance you can find a more competitive step-free deal. 7. Standard variable rate This the lender's fluctuating rate of interest and if the default rate for most borrowers when their special capped, fixed or discounted deals expire. If you are paying a standard variable rate, remortgage as soon as possible as you will almost certainly be paying more than with any other rate. 8. Mortgage payment protection insurance Although potentially beneficial, it pays to read the small print before signing up to MPPI and relying too heavily on it could cost you dear. If you fall behind with your mortgage repayments and cannot catch up again, you could eventually lose your home. MPPI pays your monthly mortgage payments for a specified period if you suffer accident, sickness, or unemployment. You can shop around for MPPI but it is usually cheaper (and the terms may be more generous) if you take it out at the time you start your mortgage. All MPPI policies have limitations though. Most do not allow you to make a claim until 60 days after the policy was taken out. Payments are usually limited to a set amount of money - around £1,000 to £1,500 per month. And they will only pay out for a set time - typically 12 months. In addition, there is an 'excess' or waiting period of up to 60 days for each claim, during which no payments will be made. So it makes sense to try to keep enough money in savings to cover two months worth of mortgage payments, even if you have MPPI. There are also some circumstances when MPPI will not cover you - for example, unemployment caused by misconduct, or that you knew was impending at the time you took out the insurance, or sickness claims caused by certain pre-existing medical condition. 9. Conditional products and fees Last year saw the introduction of the 'mortgage account fee' which lenders say is designed to cover the cost of administering a loan from start to finish. Abbey was the first to deploy these, along with Alliance & Leicester and then HBOS. They tend to be between £225 and £300 a time. Other lenders, such as HSBC decided to make it compulsory for new borrowers to open fee-paying current accounts with their new loan. The money-making ideas are sure to continue so make sure you look for strings attached.
10. Failing to pass on rate cuts It may not be the ultimate deciding factor but if you're comparing similar deals from several lenders, it is worth checking how often they have passed the Bank of England base rate reductions on to their borrowers. Many lenders pass on only part of the cut and others don't bother at all. It will give you an idea of the treatment you can expect to get once you're a customer.
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