Juggling everything from estate agents and solicitors to chains and contracts makes homebuying a major source of stress. And just when you think you are making good progress through the property jungle, there are plenty of mortgage traps buried in the small print. The Which? campaign for an end to unfair mortgage practices has succeeded in virtually stamping out some of the worst practices but big lenders are still operating expensive schemes that can catch you out. Here are five classic traps to watch out for.
1. Mortgage indemnity guarantees
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 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 MIG to the mortgage will mean you pay interest on that amount too. Which? found that thirteen of the 20 biggest banks and building societies require a MIG if your mortgage is for more than 90% of the value of the house you are buying. The most expensive Which? found was from Royal Bank of Scotland, and would cost £1,790 for someone taking out a 95% mortgage on a house worth £100,000. Of the twenty biggest providers, Bradford and Bingley, Cheltenham & Gloucester (C&G), Derbyshire, HSBC, Nationwide, Northern Rock and Standard Life do not charge a MIG.
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2. Charging interest until the end of the month
There's another sting in the tail for borrowers who finally come to pay off their mortgage if their lender is one of the six big lenders that charges interest until the end of the month. This means that, even if borrowers repay their mortgage on, say, 3 May, they'll be charged interest until 31 May, thus paying interest on money they no longer owe.
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3. Extended redemption penalties
Most mortgage deals have some kind of redemption penalty – the fee you must pay the lender if you decide to switch your mortgage early. Some mortgages also have what is called an extended redemption tie-in 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. Most experts agree that extended redemption tie-ins are best avoided because today's hugely competitive mortgage market means there is always a better deal to be had.
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4. Early repayment charges
You would think that someone who has lent you a lot of money would be delighted to get some of it back more quickly than promised. Not your mortgage lender. Unless your home loan is flexible, you will face charges if you try to repay all or some of the debt early. If you find you have a lump sum to play with, check what penalties apply to your current mortgage. You may be better of leaving the cash in a high interest account until you switch loans.
5. Annual interest review
If your mortgage lenders carries out an annual review of the interest you pay then you could be in for some bad news in 2005. Under annual interest review rules, lenders are allowed to recoup any shortfall in interest charged in one year in the next. Mortgage broker Charcol predict the one million borrowers whose mortgage companies review interest annually will see a sharp jump in their mortgage payments following the base rate increases during 2004. For a typical mortgage of £100,000, those on annual review could find their monthly interest payments rise by £83, equating to £1,000 over a year, or even more if they are unlucky enough to be with one of the many lenders who have increased their interest rates by more than bank base rate. If this is likely to affect you, make sure you are not paying your lender's standard variable rate of interest - the savings you will make by switching could help offset any increases.
Don't get trapped
'There's no excuse for the mortgage lenders still to be trapping people in these underhand ways,' says Which? Editor Malcolm Coles. With so much competition in the mortgage market, the good news is that if your lender wont help you avoid traps like these, there are plenty who will. As always, shop around for a deal which makes your money work harder and gives you the flexibility you need.
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