The mortgage market has never been bigger or more competitive. Which is good news for homebuyers. But in your rush to apply for the latest deal, make sure you are not heading straight for one of the common mortgage pitfalls. Here is a hat trick of horrors to get you thinking.
1. 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. But that has not stopped lenders from attaching them to mortgages. Despite their bad press, more and more of these loans are coming onto the market.
Ray Boulger, the technical director at mortgage broker Charcol agrees that extended penalties are making a comeback. "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," he says.
2. 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.
3. Mortgage payment protection insurance
This product is slightly different to the other two in that it can be beneficial. However, 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.
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.
Need help choosing the right mortgage? Check out this service.
Other articles by Sarah Modlock
