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5 more ways to lose money on your mortgage
by Sarah Modlock
9 March 2005
Just when you thought it was safe to sign on the dotted line... Here are five more ways that lenders allow you to lose out, whether it is your first mortgage or your fifteenth.
Click here to see 5 more ways to lose money on your mortgage
1. Compulsory insurance
However competitive the mortgage offer, there are still some lenders which insist that you have to take out certain compulsory insurance policies as a condition of getting the loan. These may include buildings and/or content insurance, or accident, sickness and unemployment insurance (ASU) and locking them into a mortgage deal is known in the trade as 'bundling'. This is seen as a purely money-making opportunity by lenders, often to re-coup losses from the 'cheap' mortgage deal they are giving you. So what they give with one hand, they take away with the other.
By signing up for bundled deals, you could end up with insurance you don't need or, worse still, that is inadequate for your needs. But the real sting is the cost. The bundled policies are likely to be overpriced so you will pay way more than you have to - often as much as 40% more than finding your own cover.
The government and finance watchdog the Financial Services Authority have been working towards outlawing the practice of bundling. In the meantime, the solution is to shop around and ignore compulsory tie-in scams, no matter how attractive the rest of the package may be. Savings of more than £150 a year can be made if you shop around for buildings and contents insurance.
2. Failing to pass on interest rate cuts
Of course, when the Bank of England's base rate goes up, increases seem to appear on your monthly mortgage statement like lightning. But when the rate goes down, lenders take their good old time to pass on the benefits. Lenders often use the excuse that they are trying to strike a balance and protect their savers as well as their borrowers. In the late 1990s, Chancellor Gordon Brown warned lenders that they must pass on rate cuts or face being compelled to do so by statutory regulation. If your lender consistently fails to pass on the full rate reduction, or even part of it, then move to a lender that does.
3. Charging interest annually rather than daily or monthly
Lenders who still charge interest annually rather than daily or monthly are also costing their customers. Seven of the top 20 lenders still do this on at least some of their mortgages, Charging interest annually means the borrowers pay interest on money they no longer owe until the lender recalculates the debt at the end of the year. On a 25-year, £100,000 mortgage charging 5.8 per cent interest, a borrower would pay almost £90 a year more with a lender using the annual rather than the daily system.
Mortgage experts say that interest calculated on an annual basis can make a mortgage 0.35% more expensive than one where the interest is calculated on a daily basis. Make sure you know how and when your interest is calculated and you could save money by switching.
4. Huge mortgage arrangement fees
The fee that mortgage lenders charge borrowers to take out competitive loans has soared by 42% in the last six months as they look for ways to increase their income according to a study by independent broker Charcol. As the UK consumer becomes more financially savvy and shops around more for a competitive interest rate, lenders are being forced to look at alternative ways to make some profit on their products.
Charcol's calculations show that fees have increased, on average, by 53% since the start of 2004, with well over three-quarters of this jump occurring in the second half of the year. In fact, the average fee increased from £339 in July 2004 to £480 at the start of 2005.
Senior technical manager Ray Boulger explains: 'The UK mortgage market is arguably the most competitive in the world, with over 100 lenders vying for business. There is a trade off between fees, interest rate and features. As a rule of thumb a mortgage with a higher fee but a lower interest rate will be better value for larger mortgages and vice versa. With regards to features, the general message to borrowers is don't pay extra for features you won't use but, for borrowers who will make use of them, there is a wide choice of mortgages offering varying degrees of flexibility,' he adds.
5. Mortgage payment protection insurance
It's fair to say that some borrowers can benefit from this product. But 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. Mortgage Payment Protection Insurance (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. But these policies have limitations. 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.
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