Warning - mortgage traps

brian · #1 (**permalink**) 08-14-2006, 03:32 PM

A couple of pointers you need to be *very* careful about when buying a home and taking out a mortgage (or remortgaging an existing property).

1. Discount rates

At present, lots of vendors offer discounted rates on new mortgages.

The danger is that you overlook the word "discount" and read it as "normal".

For example, here in the UK there are lots of fixed rate mortgages offering anywhere between 4.75%-5.75% as an introductory rate.

The problem here is that this discount is only fixed for a set period - usually 2 years - and then after that you'll be paying the full lending rate, which at present is usually a good 1% more expensive.

Added to that, with interest rates going up, after two years you could find the actual mortgage rate as higher 1.5%-2% over what you're paying now.

That means an increase of your monthly mortgage payments of between 20%-30% of what you're paying now.

Make sure you factor this into your affordability calculations, or you could be in trouble.

2. Termination fees

Once you're signed up to a mortgage, you're usually stuck with it for a fixed period - for example, 2 years.

If you find yourself having to change mortgage during this time, you can get hit with some really high fees - typically 2-5% of the mortgage value. Work that out and it adds up to a lot of cash.

Even if you stick it out for the two years, then move on to another lender, you're still probably going to face costs of a few hundred pounds for this - so make sure you account for that before moving lender.

3. Early repayment fees

It makes a lot of sense to try and pay your mortgage off early - the earlier you do it, the less interest you have to pay. And the amount you can save by paying a mortgage off early is simply staggering.

Not only that, by trying to pay off extra at first, when your mortgage comes up for renewal again (ie, after a fixed/introductory term), you should find your mortgage repayments siginificantly reduced if you've been able to put significant cash in early to help pay it off quickly.

The only point of warning is that lenders know that by paying off a mortgage early, they're losing cash and profit. Therefore most lenders will have some kind of limit on how much you can repay early - before incurring fees.

What the terms are for this will depend on your lender - some may limit it to 10% of the mortgage paid off each year, another may be nearer 25%.

Either way, if you plan to repay early, make sure the option actually does exist to pay it off early and without penalty within your early repayment plan.

stevo · #2 (**permalink**) 08-17-2006, 03:51 PM

Brian, could I pick you up on point 1 nothing you say there is incorrect but obviously the important thing is to make sure once the discounted rate has finished you are not tied-in to the mortgage beyond that because then you have the chance to find a better deal and re-mortgage without being charged a hefty fee from the lender.

Benji · #3 (**permalink**) 08-22-2006, 07:46 AM

Brian,

Good information. When I got my recent mortgage I made sure there was no pre-payment penalty and that if they sold the mortgage (which most do these days - and they did) the terms could not change with the new lender.

There are enough mortgage companies it's worh being up front about your expectations as borrower.

brian · #4 (**permalink**) 08-25-2006, 04:36 AM

Quote:

Originally Posted by stevo

Brian, could I pick you up on point 1 nothing you say there is incorrect but obviously the important thing is to make sure once the discounted rate has finished you are not tied-in to the mortgage beyond that because then you have the chance to find a better deal and re-mortgage without being charged a hefty fee from the lender.

No problem at all, and certainly there's the option of moving lender.

I think my main point is really to watch out that a discounted rate is exactly that, and not presume this is your ongoing rate in general. I actually found myself presuming that - actually, when quoted a figure, that's your mortgage, right?

The thing about moving lenders is that with interest rates rising now in the UK, the chances are that the discounted rates in a few years time will be little better than the current projected rates after discount.

In other words, just pointing out not to rely on discount figures as an indicator of actual future payments, especially in an environment where interest rates are rising.

Benji · #5 (**permalink**) 08-25-2006, 11:58 AM

With mortages I think a long term outlook may be more important than short term savings. A discount rate is designed to make it look good to the borrower, but it's candy coating wears off pretty quick - what's underneath?

Sponsors