Use these ten tips to guide you towards your best mortgage deal.
Don’t take the first mortgage you’re offered
There are big differences in the deals you can get amounting to many thousands of pounds So make sure you’ve made comparisons with others.
There’s a lot of competition between the mortgage providers.
Like supermarkets they’ll use techniques like offering “loss leaders” to lure more customers (Their pay off is that later on you’re not likely to go elsewhere because of “consumer inertia” – which we’ve all got black belts in when it comes to financial products).
Look for a mortgage lender who is offering a “loss leader”
Provided there’s no overhanging lock in you could shop around for another good deal at the end of it and save thousands.
In other words buy with a view to get a new mortgage deal every 2 years or so.
Don’t be taken in by a low sounding initial interest rate
This is known as the headline rate. Very low rates usually come with cunning long term “tie ins”.
What will happen at the end of the low interest rate term? Do you have to stay with the same mortgage lender who is suddenly only offering you a very uncompetitive rate unless you pay a big penalty (see below) to leave?
A much better guide to how much a loan will cost is the APR
Beware Redemption Penalties
When you take out a mortgage you have an agreement with the lender. This covers the amount you repay and is set for a particular period.
For example you may have a mortgage for a three year fixed interest rate of 5%.
If you want to get out of this deal before the three years is up you’d probably have to pay a redemption penalty. This is a charge which supposedly compensates the mortgage lender for the time and expense of your leaving.
Some lenders may try to hide the redemption penalties in the small print.
Simply ask your prospective lender what the exit / redemption penalties are. If you’re not sure what they mean ask them to spell it out. If you still don’t understand you can take it that there’s something they might be trying to hide so walk away.
… and “Overhanging lock-ins”
This is a penalty for leaving a lender AFTER a special deal interest rate has come to an end (ie not DURING the agreed timescale of the deal).
So, using the same example as above, if you got a mortgage with a three year fixed interest rate of 5% the mortgage lender could charge you a penalty if you left after the three years was up, say in year four.
Compare Three Mortgages
Use the following yardsticks:
– Compare all the fees charged.
– Is there an application fee?
– Will the mortgage lender pay for the Valuation?
– Is Mortgage Indemnity Insurance compulsory? (This type of insurance only insures the mortgage lender and not you). If so, how much is it costing you?
– Is the interest on your mortgage calculated at a daily rate? (This is much better for you than if calculated annually – See our Mortgage calculator – Difference Between Paying Interest Daily versus Paying It Yearly).
– What is the redemption penalty ie what will you have to pay as a penalty for leaving during the agreed timescale of the deal.
– If you secure a special deal is there any further penalty for leaving after it’s come to an end – ie an ” overhanging lock in”.
– Check the mortgage lender’s usual variable rate. How does it compare to the market? If it’s higher avoid them because this is what you’ll probably end up paying after the special deal is over (if, like most people, you forget to move mortgage lenders).
– Consider carefully how competitive is the total cost and terms of the mortgage.
Small is beautiful
Building societies often give a better deal than the banks. The smallest building societies you may never have heard of can offer the very best rates.
In addition there’s something more personal about them that you may find more attractive than the bigger operations.
Don’t tell any porkies
If you lie – eg about a bad credit history – it will very probably be spotted by the mortgage lender and screw up your chances of a mortgage.
Honesty is the least complicated and best policy. There are ways you can successfully get a mortgage if you’ve got a Bad credit history
Save thousands by getting a shorter mortgage term
Normally buying a home will cost you two or three times the price you paid.
For example, if you borrowed £100,000 to buy your house you could easily end up paying back up to £250,000 over the 25 mortgage period.
This is because of the effect paying interest has on your mortgage repayments.
If you pay more every month you’ll end up paying much less in interest.
Sure, your monthly repayments will be higher, but the overall cost will be hugely lowered.
Say you’ve borrowed £120,000 over 25 years at an interest rate of 10% on a normal repayment mortgage.
Your repayments would be £500 a month.
However, if you increase your repayments to £600 a month your mortgage would be paid off after 15 years.
You would have saved about £40,000.
Pay even more and you would be looking at even greater eventual savings.
How to work it out:
Simple. Just get the mortgage lender to work it out for you.
They should be able to give you a breakdown of
(1) Different mortgage periods, eg repaying the loan over 25 years, 20 years, 15 years and so on.
(2) Different monthly repayments amounts – which you think you can afford.
(3) The total you will have repaid by the end of the mortgage period.
If the mortgage lender’s employee won’t work it out for you (which they can, very easily), speak to a manager and ask if they really do want you to have to go elsewhere.
Despite the impression they may want to give you, all mortgage companies are interested in your business. So they should be quite willing to do this.
But be careful how they handle your overpayments
A secret trick used by the mortgage lenders is to keep overpayments (which is what you’re doing here) suspended in their own account until the end of the year. Then they credit it to you. So they’ve earned interest on your money.
Check what their policy is. If that’s how they play it then open your own high interest savings account. Then pay it all over at the end of the year. That way you gain from the interest your money earned.
Consider using a Mortgage Broker
Many people use brokers for convenience. They’ll do the legwork for you and often it costs you nothing extra because they’re happy to do it for the fee they’ll get from the mortgage lender.
However, do note that some lenders try to save money on paying fees to brokers by giving you a better deal if you go direct.
However, all you have to do here is take the best quote from a broker and use it for comparison with mortgages you can buy direct.