Comparing Mortgages To Get The Best Deal For You
Having selected the type of mortgage that would be right for your particular circumstances, the next step is to come up with a shortlist of banks and building societies that can offer a suitable product.
But when it comes to mortgages, comparing like with like is not always easy. Even price comparison websites can struggle to do the broker’s job and churn out best-buy mortgages, because of the sheer complexity of rates and hidden charges.
How on earth do you compare a mortgage offering free fees and cash back with another offering a two per cent discount for the first year, but subject to redemption penalties?
Even mortgage brokers need special programmes to break it all down into digestible components.
Of course, the thing about ‘free’ incentives is that they usually aren’t. You normally end up paying in some other way, such as a higher interest rate or stricter penalties. A very competitive headline mortgage rate will usually be counterbalanced by some hidden charges cunningly packaged into the deal.
Incentives and sweeteners
Mortgage advertisements frequently proclaim a host of freebies in a bid to win your business. Some incentives are well worth taking advantage of, but there may be drawbacks, so let’s see what these goodies are actually worth.
Opting for a deal with a deeply discounted interest rate for a limited initial period can be very useful when you’ve got 101 other expenses to budget for. Savings here can help fund furnishing your new home.
But watch out for the nasty surprise of ‘payment shock’ a year or two down the line when the mortgage reverts to the full rate and your monthly payment may nearly double.
Some standard mortgages now take account of modern work trends such as contract-working, self-employment and part-time employment. So your mortgage may allow you the flexibility to make larger monthly payments when business is good, and to take a ‘payment holiday’ or reduce payments when money is tight.
Wouldn’t it be nice if your lender gave you a large dollop of cash with your new mortgage? Mortgages that offer the incentive of ‘cashback’ may be very useful when it comes to paying for furnishing the new home, but they tend to be more expensive in the long run, charging higher interest rates.
Such deals are not widely available, and only apply for applicants requiring loans that are low in relation to the purchase price (a low LTV). Unless the interest rate on offer is especially keen, negotiating an overdraft or zero per cent credit card deal may be a better short term option.
The bulging brown envelope was also traditionally a popular ‘marketing tool’ with developers of new homes, but overly generous incentive packages can lead to mortgage valuation problems.
Your lender and solicitor will insist that your new home is covered by buildings insurance from the day of exchange of contracts (even though you won’t move in until completion day).
It normally pays to shop around to get the best deal. But some lenders will pay the first year’s cover in advance, which is well worth having as long as the mortgage itself is competitive.
But lenders do this because they know we all get a bit lazy once insurance is set up and don’t bother switching.
So remember to shop around when it comes up for renewal so that you don’t get tied in to uncompetitive cover.
Fees-free deals are a widely advertised headline incentive that can save you quite a bit – except for the fact that lenders tend to compensate by charging higher interest rates.
But the main catch is that should your purchase fall through, or if the mortgage doesn’t proceed, they may not be free after all. This is evident where for example you have to pay an initial ‘arrangement fee’ which is refunded upon completion of the mortgage.
To compare one mortgage deal with another you’ll need to list all the fees the lender charges (or refunds), as these can easily add up to several thousand pounds, making a headline interest rate not as sharp as it seems.
Fees-free deals commonly apply to:
Lenders normally appoint a surveyor to carry out a mortgage valuation to confirm that the property is actually worth what’s being paid. Lenders typically charge anything from £200 to £800 for this (depending on the purchase price) and may send you a copy of their report.
There are a number of surveys that you need to have carried out to avoid being stung, for an instant quote on the best surveyors in your area, click here.
Although a mortgage valuation is not a proper survey, and has very limited content, getting it free can be a useful saving.
Solicitor’s fees are often the next biggest expense after forking out for a deposit. The catch here is that ‘free’ legal fees may only refer to the legal work that covers the lender’s interests, or just the basic conveyancing costs for you and them.
It also won’t exempt you from the whole array of legal ‘disbursements’ and fees for searches and stamp duty tax. And it may limit your choice of solicitor.
Super-low interest rates
Lenders sometimes come up with headline-grabbing, super-low interest rate deals. But closer inspection may reveal this is subsidised with several thousand pounds of hidden charges.
When it comes to thinking up new names and bizarre reasons for fees, no one can beat bankers for creativity – arrangement fees, application fees, reservation fees, higher lending fees and completion fees to name but a few.
To judge how competitive such deals really are, divide the upfront fee by the total number of months that the mortgage deal lasts.
For example, a two-year mortgage deal with a £1,500 ‘arrangement fee’ would be equivalent to paying an extra £62.50 per month in interest over 24 months (plus a bit more for the interest you’d have earned on your money by not having to pay it all up front) – which is the same as paying an extra half per cent on a typical £150,000 mortgage.
Adding costs to the loan
Even if you’re not offered any freebies, your lender may let you add some charges costs to the loan, which can be extremely useful when money’s tight as it reduces your upfront costs. But it’s not so generous when you calculate how much interest you end up paying over 25 years.
That just about exhausts the range of sweeteners and goodies that you’re likely to be offered. But there is another side to this coin which makes sobering reading – the small print.
Penalties and hidden fees
Mortgage lenders’ marketing departments are becoming ever smarter at devising insidious ways to catch out customers by camouflaging fees and charges. Even the most reputable brands in banking are not averse to burying all kinds of nasties in the small print.
A seductive headline deal may be used as bait to reel in an unsuspecting customer who, having signed on the dotted line, is then subjected to outrageous charges and penalties. The financial services industry is of course no stranger to accusations of mis-selling, where customers are tricked into buying dubious financial ‘products’ without being told the full story.
Regrettably today, shopping around for a mortgage is as much about spotting the ‘sting in the tail’ as it is about securing a good mortgage rate. Again, this is where a decent broker can help spot dirty tricks. Below are some well-known nasties to steer clear of:
MIGs and HLCs
‘Mortgage Indemnity Guarantees’ (MIGs) are a one-off insurance premium charged by some lenders where the mortgage is high in relation to the value of the property. ‘Higher Lending Charges’ (HLCs) are similar to MIGs. Calculated as a percentage of your mortgage, they could add several thousand pounds to the cost of the loan.
Although not so common as they once were, lenders normally find some way of charging you more for higher percentage loans over about 75 per cent LTV, even if it’s just by imposing a higher interest rate.
Many home owners were sold MIGs in the late1980s, just before the market took a severe and prolonged downturn, causing some to default on their mortgages – just the kind of situation such policies were designed for. So when repossessed properties were sold for less money than the mortgages secured against them, many owners assumed they were covered.
In fact, such policies only protect the lender against the risk of losing money.
Having paid out to the lender, the insurance companies who provide such guarantees then doggedly pursued the luckless evicted former home owners for the balance.
Although some lenders will add the cost of arranging such policies to the loan, MIGs are best avoided. The best solution is to somehow come up with a bigger deposit, reducing your loan-to-value ratio and thereby sidestepping such penalties. Alternatively look for a more competitive mortgage deal.
Early redemption ‘tie-in’ penalties
Say you agree to take out a two- or three-year mortgage, perhaps at a low fixed rate; it’s normally made very clear that you’d have to pay a stiff penalty should you redeem it during this period, for example if you move house and pay it off. Fair enough.
But what has caused grievances in the past are where such ‘tie-ins’ or ‘lock-ins’ overhang the initial reduced rate period, perhaps continuing for a couple more years.
Here extended penalties tie you in beyond the agreed two- or three-year term at an uncompetitively high rate, usually the lender’s SVR. Any earlier savings you made would later be more than recouped by the lender.
But should you instead decide to repay (redeem) part or all of the mortgage before the extended term you’d then get badly stung with a redemption penalty, typically three or six months’ interest.
Moral: look beyond the headline rate. And if you’re planning to move again in the near future, don’t get a mortgage that ties you in.
Being wise to the danger of early repayment penalties, you may decide to wait until the end of the agreed term before paying off the old mortgage and switching lenders.
But guess what?
A fee of several hundred pounds appears in the small print of your solicitor’s final account – it seems your friendly mortgage lender has been busy upping their ‘redemption charges’ by several hundred per cent since you took out the mortgage, supposedly to cover administration costs.
Some well-known High Street lenders have been condemned by consumer groups for unilaterally imposing hefty redemption penalties in breach of contract to customers innocently paying off their mortgages.
Annual interest calculation
One sneaky trick employed by some lenders is to calculate the interest they charge you on an annual basis. This will cost significantly more than if it was charged daily.
It works like this. When you make a mortgage payment, that sum of money should immediately reduce the amount of your mortgage debt, which in turn should straight away cut the amount of interest you’re charged.
But with some lenders, your monthly payments don’t reduce your mortgage until 1 January next year, so you’re paying interest on a larger sum than you actually owe. This adds up to a sizeable amount over a number of years.
Those nice, big-hearted folk at the bank are at it again. ‘We’ll arrange your buildings and contents insurance when you take out a mortgage with us.’ That’s very kind, except for one small thing: the cost of the policy is far more expensive than if you arranged it yourself.
Some lenders force customers to buy their buildings and contents insurance. This may be the catch with an otherwise cheap deal, so you could be better off opting for a dearer mortgage and shopping around for insurance quotes online.
Some lenders adopt a sneakier approach. When applying for the mortgage online, the website reminds you that building insurance is compulsory. But this is deliberately presented in an ambiguous way that looks like you have to tick the box to proceed.
Knowing you’ll be stressed out by this stage, and afraid that one false click of the mouse will wipe out all the data you’ve just spent 45 minutes inputting, they take advantage.
Alternatively some lenders charge a fee, say £100, if you don’t take out their insurance (which may actually be a better option in the long run).
Payment Protection Insurance
PPI is just the latest mis-selling scandal. As the name suggests, these policies were sold to prudent folk who simply wanted to be sure their monthly mortgage payments could still be paid in the event of redundancy or injury.
But when it came to actually claiming and paying out, in many cases there were so many exclusions that the policies weren’t worth the paper they were written on. Avoid.
Doing your mortgage application
Once you’ve picked the best mortgage deal, all that remains is to fill in the lender’s form. Getting your mortgage approved can take a couple of weeks if it’s a reasonably straightforward case.
It helps if some of the donkey work has already been done by your having previously obtained an ‘agreement in principle’ – a certificate, valid for up to six months, which confirms how much you will be loaned, subject to valuation and credit checks.
Ever-growing numbers of people are applying online. This is fine if you’re confident about exactly which deal you want and don’t need further guidance. You fill in an application form online and submit it to the lender. But as seasoned form-fillers will know, websites vary greatly.
Most of us have experienced the frustration of slogging away for half an hour inputting personal data and then clicking the final ‘continue’ button only to be informed that ‘There has been an error, please try later’, and all your data is lost in cyberspace.
Sometimes it’s easier to be guided through the process by an independent broker who’s ‘on your side’.
Completing the mortgage application form
Most lenders’ application forms run into several pages and typically require the following information:
- Name, address and date of birth of each applicant
If you’ve lived at your present address for less than three years, you’ll also need to give your previous address. A contact number must be provided for the lender’s surveyor to call to arrange access to do the mortgage valuation (normally via the estate agent).
- Address of the property you plan to buy, the agreed price and how much you want to borrow
- Your solicitor’s details
- The amount of your deposit
To avoid money laundering, lenders may ask where the funds came from (such as from your savings, or as a present from a relative).
- The employment details of each applicant
- Job titles, employers’ names and addresses, salaries, length of time in employment.
- Salary details
- Annual salary, commission, bonuses, company cars etc.
- Bank account details for each applicant including how long you’ve banked there
- Whether you’ve ever been declared bankrupt or currently have any CCJs
- Any other loans for each applicant – such as outstanding credit card debts, or personal loans.
In these days of identity fraud, proving who you are may not be as simple as it seems, but hopefully it shouldn’t become a Kafkaesque nightmare. A visit to the local branch of your chosen mortgage lender should hopefully be all that’s required, or you may even be able to apply by post (recorded delivery). If there’s a broker involved, they should be able to organise this. In order to prove who you are and what you earn, a number of key documents will need to be supplied, such as:
- Passport or UK driving licence
- Utility bills to verify your address
- Wage slips for three or six months
- P60 PAYE statement (summary of the year’s salary provided by your employer)
- Bank statements
What happens next?
Once your application has been accepted, and your income and credit references all stack up, the property you’re buying will be valued by a mortgage surveyor appointed by the bank. Within a week or two the lender should write to you and your solicitor with the all-important mortgage offer, confirming the availability of funds for your purchase. The offer will have a number of standard conditions attached – check that you’re happy with these, as they are often badly worded – and you are legally bound to comply with them. Then once you and the solicitors are ready, you should be able to exchange contracts.