Mortgages Guide | Mortgage Help Product Information

TheMoveChannel.com | Mortgage Rates

Introduction

It's not that lenders are out to get you, but there are quite a few features of many mortgages that can come as a nasty surprise if they catch you unawares.

Early redemption penalties

This is the most common of all the pitfalls that are found with mortgages. Any special offers usually only last for a set period of time. During this period you will be severely penalised if you try to switch to another product or mortgage provider, either by selling your house or by remortgaging. The mortgage market is so competitive that many products are sold as a 'loss leader' - meaning that the lender will not make a profit on the deal until you have held the product for a number of years. Lenders compensate for this by making sure you hold on to the product until they make a profit, by charging extremely punitive fees if you try and switch before then.

Redemption penalties can be stepped just like discounts, and can be particularly severe within the first year. This is to try and ensure that the costs that the lender endures in setting up the mortgage are always covered, regardless of whether or not you stick with the mortgage. Penalties are also particularly severe in the non-conforming market where can be as high as 5 or even 6 percent of the loan value for the fist 3 years.

Redemption penalties can be a fixed sum of money, though it is more usual to see a proportion of the loan, or an amount of interest used as a deterrent to cashing in early. A 'fine' of up to six months' worth of additional interest is common, though it may easily be as high as one year's worth of interest. With cashback mortgages, you often have to repay the amount of money you received as cashback. The total redemption penalty can run into thousands of pounds, which is usually enough to put most people off the idea of switching.

The duration of the penalty period varies from mortgage to mortgage, though a great many products have no early redemption charges whatsoever. There is frequently a trade-off between getting a competitive interest rate for a lengthy fixed or discounted period and making yourself vulnerable to early redemption charges. Sometimes, however, there is an overhang, where the redemption period extends beyond the introductory offer. Where there are 'extended' redemption penalties, you can be tied in to paying the uncompetitive Standard Variable Rate (SVR) for a period of time after the introductory offer period, as the lender seeks to recoup some of the cost of offering you such a competitive rate. Redemption penalties are normally waived in the event of death.

Flexibility of payment size

You should find out whether you are able to increase or decrease your payments should your circumstances change. Some mortgage lenders are very strict about allowing you to alter the terms of your mortgage and it is better to know this up front.

Also find out whether you can make lump sum repayments. If you can, there may well be maximum and minimum amounts that you are allowed to pay off. If you come into some money, it can be a good idea to pay off a chunk of your mortgage, as this will reduce the total amount of interest you pay over the life of the loan. You should also find out when the account is credited, as it may be on a fixed date each year. If this is the case, you may as well delay paying the money in until just before that date. There is no point paying it in if it has no immediate effect on your outstanding capital, when it could be earning you interest elsewhere.

You will not normally be able to make lump sum repayments during the redemption penalty period.

Required products

Many lenders will insist on you taking up certain 'mandatory' products when you buy a mortgage. These can include household insurance, life assurance or accident, sickness and unemployment cover. Mandatory products that you are forced to purchase directly from the provider are not always very competitive.

As with all products, the actual cost of mandatory insurance will vary, but most policies from lenders will cost you more than they would on the open market, often by as much as 30 or 40 percent. For some policies, this can equate to as much as an extra quarter of a percent on your interest rate.

Default

If you default on your payments, the lender will eventually be entitled to sell your home in order to recover the loan. Whilst this is an eventuality that most people will not want to consider, it may be worth seeing if you can find out what the lender's stance is on this. Different lenders will have different policies on how long they give you before they start the proceedings to recover the loan. Many will have a separate schedule of charges which you will incur before they start proceedings.

Most lenders will only repossess your home as a last resort. Most mainstream lenders subscribe to The Mortgage Code, which binds them to consider all cases of mortgage arrears sympathetically and positively.

If they do remove you and sell the house, the lender is only entitled to keep the amount of money owed to them - any outstanding capital and interest as well as the expenses they incur in repossessing your home. The remainder of the sale price is passed back to you. If you have gone into negative equity, unfortunately you will still owe the lender the balance of the debt, less the property sale price. They may then try to liquidise any other assets you have, in order to cover the remaining debt and you could even end up being declared bankrupt.

Guarantors

If a lender is concerned about your ability to repay your loan, they may require you to find a guarantor for the loan. The guarantor is then responsible for payments if you default.

CAT Marks  >>