Mortgages Guide

The British trend to try and own your own home is one that has caused huge changes in the mortgage market. The UK has some of the most competitive and creative mortgage offerings in the world but you need to be well informed to take advantage of the best offers in the market.

Typically savvy financial planners will change their mortgage around every five years and because of this, in our opinion, one of the most important considerations when taking out any mortgage is what will the total cost of ownership be over the expected lifetime of the mortgage? In order to calculate these you need to take into account all of the fees you will pay in order to secure your mortgage.

In our opinion too many people in the UK see mortgage debt as not real money. It is a good exercise when buying a house to imagine that you have already earned all the money that you are offering because in theory that is what you will be doing throughout the course of the mortgage. That way you will be more protective of costs overflowing. Just because a M.I.G. fee or valuation fee is included in the mortgage itself doesn’t mean you don’t have to pay for it so remember that, and try to drive a hard bargain.

In the competitive market of mortgages many products are sold as loss leaders and some common tactics to get cash from consumers by mortgage companies to make up for this shortfall are:

Redemption penalties:
A redemption penalty is a penalty that you must pay if you redeem your mortgage before the agreed date, which is usually longer than you want to keep the mortgage for. Fixed rate and discount mortgage offers will often have redemption fees to cover the cost of providing such a competitive rate but if you are going to go for a deal like this they can also be advantageous. It’s important to look at the total cost of having that mortgage from the time you take it out to the time you expect to redeem it and compare that cost against deals without redemption fees. You may find that fixed rate deals offer a better total cost for you even if they have a high redemption at the end.

Cash back:
At the time of buying a home many people are in financially weak positions, investing possibly years of savings into property therefore a bit of cash back can always come in handy for moving in expenses. It is important to remember though, if you get cash out of your mortgage you will be paying it back for longer; For every £500 you borrow on cash back it is likely you will pay back £1000 or more over the total life of the mortgage so it is worth considering other forms of debt for your short term needs if possible.

Overhang is a term used where a mortgage still ties you in by not allowing you to repay the loan in full at the end of the special offer period but without sometimes heavy penalties.

Mortgage Indemnity Charge (M.I.G)
The mortgage indemnity charge sometimes called a high percentage lending fee applies to some high loan to value (LTV) mortgages. This is where the mortage itself is not much less than the value of the house it is secured on, normally above 90% LTV. It is fairly common practice for the lender to take out an insurance policy to extract yet more money from hard up home buyers in case their loan turns bad, they incur losses and if property needs to be re-possessed, which can’t be covered by the value of the house.

For high Loan to Value (LTV) mortgages i.e. where the loan is not much less than the value of the property, it is common practice for the lender to take out a form of ‘insurance’ to protect against some or the entire loss incurred if the property needs to be taken into possession because of serious arrears. It is common practice for lenders to pass this charge on to the borrower. Depending on the amount of loan and the LTV ratio the M.I.G. fee can be a significant cost. Most lenders have a different name for this charge so make sure you ask about it.

You should also understand that because the charge acts as a form of insurance for the lender not the borrower the lender can claim part or even all of its ‘losses’ should you fall into serious arrears and they need to repossess the property. It is important to understand your responsibilities when taking on a mortgage and if you are in any doubt you should consult your IFA who will be able to help you understand what they are.

There are 4 main different types of interest structures for mortgages:

A fixed rate mortgage means that the amount you repay each month to the lender can be at a fixed rate for a period of time. This period is normally 2-5 years but can be longer or shorter. Normally at the end of the special fixed rate period the mortgage reverts to the lenders standard rate which varies dependent on interest rates and market conditions. It is probably a good time to look for a new fixed rate deal at this point if you have no redemption.

On fixed rate products lock-ins like redemption penalties, overhangs and high upfront fees are commonly applied so it is important to calculate your estimated total cost of mortgage with these deals as well.

A capped rate mortgage is nearly the same as a fixed rate mortgage with one difference. That is if the lenders standard variable rate drops below the capped rate the borrower gets a discount in payments based on the new variable rate. However if rates go the other way then the lender only has to charge a maximum of the agreed capped percentage rate of interest. Again, as with fixed rates, high up-front charges and ‘lock-ins’ are common with this type of mortgage.

A discounted rate mortgage is where the lender offers you an introductory period where the rate will always be a certain percentage below the standard variable rate for the lender. The rate is variable but will always be below the SVR by a certain agreed percentage for the promotional period. With these mortgages up front costs are not as common but redemption penalties and overhangs are still common.

The other problem is that with a discount, some borrowers can get a nasty shock when the period ends and the payments take a huge hike if the discount is significant.

With variable rate mortgage borrowers pay the standard variable rate and this could fluctuate resulting in higher or lower payments dependant on market conditions. The SVR will normally follow the bank of England base rate up and down but must not be confused with it.

Valuation Fee:
The mortgage lender will always want a valuation of the property before they secure a mortgage against it. However most valuations will only check basics and if you want a more accurate valuation you should consider getting a full report. Although more expensive, this will tell you more about the property if you are set on buying it and help you negotiate on price if there is anything wrong.

Frequently lenders will include an administration fee as part of the valuation fee collected to cover the costs of arranging the valuation, but shop around because a lot of lenders will give you a free valuation with no fees.

Legal Fees
It is normally necessary to have a solicitor or licensed conveyancer to act on behalf of the mortgage applicant and the lender in the house purchase or re-mortgage transaction. You need to build in the cost of having this service to your budget as it can be considerable. Some mortgages will cover your legal fees as a special offer.

Booking or Arrangement Fees
These fees are upfront extra fees normally on mortgage deals which reserve the finance on limited offers and line the pockets of the lenders a bit more for no real reason. Booking fees are often non-refundable, if you decide not to go ahead, you lose your fee.

You cannot buy a property on a mortgage without it being insured and so it is important you have insured the property before you purchase it. Your lender will want to see evidence of this before you complete. You don’t need contents insurance as well but it is advisable to look into a comprehensive buildings and contents policy at the same time to cover the contents as well as you may be able to get a better deal.

Other types of insurance you might want to consider depending on your personal circumstances are mortgage payment protection plans that pay out if you are unable to meet the payments through injury or sickness. This form of insurance has become more important as the Department of Social Security has steadily withdrawn the benefits available, but it is not compulsory.

As mortgages are the most complicated of any type of borrowing you will almost certainly need the help of a professional advisor to understand and get the best deal on a mortgage. Many of the IFA’s listed on our site are happy to help you for free because they will receive a kickback from the mortgage companies if they refer you as a customer so it needn’t be costly.