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Summary
These days mortgages can be saddled with all sorts of extra charges – and some are especially devious. This article explains what to look out for.
Author: Michael Challiner
Most mortgage buyers feel like celebrating when they close a low
interest rate deal. Securing a low rate of interest is everyone's prime objective but let's hope they weren't too blinkered.
The problem is that in many cases, fees and charges are often poorly explained, or kept out of immediate view, and these can add up to thousands of extra pounds over the period of the mortgage.
Unwary homeowners can easily opt for a very plausible rate of interest only to find out a few years later when they want to re-mortgage for a better deal, that they're faced with retaliatory early redemption fees. Other will find that, along with their bargain cheap rate of interest comes a hefty arrangement fee.
The mortgage industry has found that low rates of headline interest pack the punters in. So they put a lot of energy into devising ancillary and less obvious ways of parting you from your money. Here are some of the area's you need to check out:
Charging interest at the month end
Some lenders like the Stroud & Swindon and the Skipton building societies, charge interest up to the end of the month in which you redeem your mortgage. This can mean that if you later decide to switch that mortgage, you can effectively end up paying interest twice for the month in which you switch.
For example, if you switched on the 1 st of the month you will be charged interest by you old lender up to the end of that month – and at the same time your new lender will also have started charging you interest from the 1 st , your switch over date. This means that you will end up paying double interest for that month. Sneaky eh!
The way around this is to plan the switch to complete just before the month end. That way you'll minimise the double payment. The trick is to be aware of the problem and plan for it.
Annual Interest Calculations
Another sneaky one! Here the lender charges you interest based on what you owed at the commencement of the year. This means that you end paying interest on money you've already repaid months ago. Who are the guilty ones here? Well fortunately there are only a handful, the most well known of them being the Portman Building Society and the West Bromwich Building Society.
What you really want is interest to be calculated daily. This means that all your repayments are credited immediately and you end up paying interest on exactly what you owe.
Arrangement Fees
Where fixed rate arrangement fees are charged they tend to be in the £399 to £650 range but you can end up paying much more if the fees is calculated as a percentage of the sum you've borrowed.
Some lenders such as the Woolwich, the Northern Rock and the Nationwide offer borrowers the option to pay an arrangement fee and pick up their headline interest rate or refuse to pay the fee, in which case they pay a higher interest rate.
For example, the Nationwide's current 10 year fixed rate is 4.88% but attracts an arrangement fee of £399; their fee free version of the same product charges 5.28%. This means that if you go fee free, the monthly payments for a £125,000 mortgage work out at £751.28 whereas if you paid the fee and added it to your mortgage the monthly payment would be £724.90. Over the full ten years of the 10-year fix, you'll end up paying £3,165.60 extra for the privilege of going fee free.
As a general guideline, the longer you expect to stay with a mortgage, the less it's likely that a fee free option will work out cheapest. So, always ensure that you or your mortgage adviser works out what's the cheapest way to go.
Exit Fees
These are the charges levied by almost every lender when you pay off a mortgage or switch.
In theory they are meant to reflect the administration cost of the redemption process but if this is the case why do these charges vary from Britannia's £35 up to £295 with the Alliance and Leicester? The Financial Services Authority is currently investigating the matter.
Extended tie-ins
Beware of deals that tie you in with big penalties to remain with the lender for several years after the deal rate ends and which then move you to an uncompetitive rate of interest.
For example, the Portman currently has a fixed rate deal running to May 2008 at just 1.79%; but after May 2008 you have to stay with the same mortgage for another 4 years and on the society's standard variable rate. And if you want to jump ship before May 2012? Then if you moved before May 2009 you'd be charged an exist fee equal to 7% of the outstanding mortgage, 6% in the following year, then 4% the next year and 2% during the final lock in year.
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Did you know?
A survey conducted by Experian, the largest UK credit reference agency, found that 54% of applicants for personal loans were refused. Of those accepted for a loan, 43% were offered a higher rate than the rate they saw advertised. That's why, if you're searching for a personal loan, it's a good idea to apply through a loan broker who will know the lenders who'll best suit your circumstances.
Did you know?
Recent research has shown that 53% of motor insurance is now bought online. That's because surfing is a sure fire way of tracking down the best deals. And at renewal time, surf around again! Don't automatically accept your renewal notice without rechecking premiums on the Internet.
Today's Tip
Don't buy direct from a Life Insurance Company until you have received at least two life insurance quotes from a specialist life insurance broker. That way you're bound to get a great deal.
Did you know?
Secured loans always attract the lowest interest rates. That's because the lender is protecting his risk by taking a legal charge against your property. Then, if there is a default, the lender can call in the loan and, in the final event, sell the property in order to recover the money you owe.
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