the motley fool mortgage guide
TRANSCRIPT
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Mortgage Comparison Centre
Mortgage
Guide
10 Tips or aHappier
Home Loan
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The UK is oten reerred to as
‘a nation o homeowners’.
That’s hardly surprising, given
that nearly seven in ten o us
own a home, which is a ar higher
proportion o owner-occupiers
than in many European countries.
O course, the money to buyour nests has to come rom
somewhere, which is why around
1 million households have a
mortgage. At the end o 005,
British mortgage borrowers owed
a total o £965 billion, which
comes to an average o over
£8,000 per home.
Most o us take out a 5-year
mortgage, which we repay by
way o three hundred monthly
repayments. With interest-only
mortgages, you only pay interest
during these 5 years, ollowed
by one lump sum to pay o your
debt. With repayment mortgages,
you repay the debt as you go.
I you’re going to make the most
o your mortgage, you need to
minimise the amount o interest
that you pay (and the same
goes or other mortgage-related
expenses, too). This guide shows
you how to do just that - and
points out a ew pitalls to watchout or.
Introduction
10 Tips or aHappier
Home Loan
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ContentsNo. 1 Don’t over-stretch yoursel . . . . . . . . . . . . . . . . . . . . . . . . 4
No. 2 Loyalty costs you plenty. . . . . . . . . . . . . . . . . . . . . . . . . . 6
No. 3 Get the best mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . 7
No. 4 Interest-only or repayment? . . . . . . . . . . . . . . . . . . . . . . . 9
No. 5 The joys o over-paying . . . . . . . . . . . . . . . . . . . . . . . . . 10
No. 6 Watch out or overpriced insurance . . . . . . . . . . . . . . . . . 1
No. 7 Beware o ultra-low rates . . . . . . . . . . . . . . . . . . . . . . . . 14
No. 8 Sleep easier with a xed or capped rate. . . . . . . . . . . . . . . 15
No. 9 The horror o hidden ees . . . . . . . . . . . . . . . . . . . . . . . . 16
No. 10 The benets o a fexible mortgage . . . . . . . . . . . . . . . . . 18
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Don’t over-stretch yoursel When you’re arranging a
mortgage, you need to be sure
that you can keep up your
repayments. I arrears begin to
pile up, you could end up losing
your home. You may have seen
this warning on literature rom
mortgage lenders, “Your home
is at risk i you do not keep up
repayments on a mortgage or
other loan secured on it.”
O course, the cost o your home
doesn’t stop at its price. There are
other upront costs to consider,
including stamp duty (an extra
1% to 4% o your purchase price),
survey and legal ees (around£1,500 or more). Also, your
mortgage repayment is just one
o a host o monthly expenses,
including insurance policies (lie,
sickness, buildings and contents,
etc.), Council Tax, maintenance
costs, utility bills and so on.
Here are three ways toreassure yoursel that
you’re not going to beover-stretched: The rst is to put down a large
deposit. I you have a 10% deposit,
you’re less likely to all into
negative equity (where your home
is worth less than your mortgage)
than someone who has a 100%
mortgage.
1 Continued . . .No.
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The second way is to limit yoursel
to borrowing, say, less than ½
times your income (or ½ times
a couple’s joint income). People
borrowing large multiples o their
salary (say, our times or greater)
have come a cropper in the past.
Thirdly, i your mortgagerepayments go up and down when
interest rates change, budget or a
% increase in rates. That way, you
won’t suer ‘payment shock’ when
interest rates eventually start to
climb.
In addition, double-check your
gures by listing all your income
and outgoings so that you know
how much income you have
spare to meet your mortgage
repayments.
One rule o thumb is not to
spend more than a third o yourdisposable income on your
mortgage. I your mortgage is
costing you more than hal o
your spare income, you don’t have
much room or manoeuvre
i things take a turn or the worse!
Don’t over-stretch yoursel
1No.
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2
Loyalty costs you plentyAlthough aithulness is to be
prized in other relationships,
it’s positively harmul when it
comes to your mortgage and
other nancial products!
Why limit yoursel to dealing with
a single mortgage lender, when
there are around 150 lenders eager
to do business with you?
In act, being loyal can cost you a
ortune. I you don’t have a special-
rate deal with your lender, you’re
likely to be paying its standard
variable rate (SVR). Generally, big
lenders charge an SVR around %
above the Bank o England’s base
rate. However, Best Buy variable-rate loans come in below the base
rate, which means a saving o %+
a year. On a £100,000 interest-only
loan, this means an extra £,000 a
year in your pocket.
One great strategy is to become
a ‘rate tart’, nding a better deal
whenever you can do so without
penalty. This approach should save
you tens o thousands o poundsover the lie o your mortgage.
No.
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3
Get the best mortgageAs the UK’s hyperactive housing
market slows down, lenders are
cutting each other’s throats to
tempt homeowners away rom
the competition. Re-mortgaging
is big business and can account or
up to hal o total lending.
Nevertheless, beore goingelsewhere, talk to your current
mortgage lender. All the major UK
lenders have a ‘turnaround’ team,
whose job it is to hang on
to your custom. I you have a good
payment history, you should be
able to squeeze a much better deal
rom your lender by threatening to
take your business elsewhere.
Ask or a settlement gure or
redemption statement - that’ll
grab their attention!
Beore you switch loan or lender,
nd out what incentives are on
oer. Many lenders provide ‘ee-
ree switching deals’ by paying
(or making a contribution towards)your valuation and legal ees.
Others oer cashback when you
draw down your loan. Typically,
these perks are worth £500 to
£1,500, which you should actor
into your calculations.
Continued . . .
No.
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I your existing lender won’t come
up with a winning deal, it’s time to
try the opposition.
Our Mortgage Centre is a good
place to start, as are the Best
Buy tables in the weekend
papers, Teletext or the website o
independent nancial researcherMoneyacts.
Also, or truly independent
advice, contact a reputable no-ee
mortgage broker, such as London
& Country Mortgages, Alexander
Hall, Clear Cut Mortgages or the
No Fee Mortgage Company.
These companies will nd the
deal that’s right or you by
searching through 8,000 home
loans or more.
You’d get several quotes rom
tradesmen beore choosing one, so
do the same with your home loan!
Get the best mortgage
3No.
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4
Interest-only or repayment?In the Eighties and Nineties,
the vast majority o mortgages
were interest-only loans.
This means that borrowers only
paid interest on the money they
owed, without chipping away
at their debt. In order to pay o
the debt ater 5 years, they
would invest money to producea lump sum.
Most people in this situation
were sold an endowment, which
combines lie insurance with
an investment plan. However,
in recent years, a combination
o high charges and depressed
investment returns has all butdestroyed the credibility that
endowments once had.
Nowadays, most people choose
to have a repayment mortgage,
where part o each monthly
repayment goes towards paying
o their loan. With a repayment
mortgage, you are guaranteed
to pay o your home loan,
assuming that you make all
your repayments on time.
I you’re worried about uture
investment returns, or have an
endowment that won’t clear your
mortgage, you could convert all
or part o your mortgage into a
repayment loan. Some lenders will
charge you a ee o around £150
to do this, but this may be worthpaying i you want to play it sae.
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The joys o over-paying
5
Taxpayers who save money in
taxable savings accounts have to
pay tax on their interest: a th
(0%) or basic-rate taxpayers and
two-ths (40%) or the UK’s three
million higher-rate taxpayers.
So, a gross (pre-tax) rate o 5%,
would all to 4% or % ater tax
is deducted.
On the other hand, i you
overpay your mortgage, you
eectively ‘earn’ tax-ree interest
at your mortgage rate. So, i your
mortgage rate is, say, 6.75%, your
tax-ree return is also 6.75%.
To earn 6.75% in a taxed savings
account, you’d need to earn 8.44%
beore tax (11.5% i you’re a
higher-rate taxpayer). Since no
sae investment oers this kind o
return, ‘saving’ into your mortgage
can be a good idea. In act,
multi-billionaire investment guru
Warren Buett has remarked that,or most people, overpaying their
mortgage is the best nancial
move they can make.
Continued . . .No.
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5
The joys o over-payingWhat’s more, a borrower with a
£100,000 repayment mortgage,
paying a discounted rate o
4.75%, could cut his/her interest
bill by £11,96 by overpaying
£50 a month. Even better, this
overpayment means that the
mortgage term alls rom 5 years
to 1½ years, which means ½years more un in later lie!
Beore setting up a standing
order or dropping a lump sum
into your mortgage, check with
your lender to make sure that you
won’t be punished or doing so.
I you will be penalised, put the
money into a Best Buy savings
account and whack it into yourmortgage when you’re ree to
do so without penalty.
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Watch out or
overpriced insuranceUK banks make billions o pounds
a year rom mortgage borrowers,
thanks to the interest on over £850
billion o mortgage debt. However,
they also make enormous sums
rom selling high-priced protection
to their borrowers.Mortgage lenders make it ‘easy
and convenient’ or you to buy
their own cover, oten collecting
the premiums with your monthly
mortgage repayments. But this
is simply a cunning trick to make
you orget that you’re over-paying
or this protection! For example,your mortgage lender may have
‘encouraged’ you to buy one or
more o these policies:
Lie insurance.I you bought this rom your
mortgage lender, your premiums
are probably three times as high
as they could be. Getting cheaper
cover will save you thousands
over the lie o your mortgage.Also, you don’t need this cover i
you’re young, ree and single, but
it’s essential i you have a partner
and/or dependent children.
Income protection(long-term sickness cover)
and critical illness insurance
(protection against cancer, heartattack, stroke and other serious
conditions). As above.6 Continued . . .
No.
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Home insurance(buildings and contents).
Another nice little earner or
mortgage lenders. Ignore any
sales patter, such as “our tailor-
made policy makes it easier to
claim”. Instead, switch and save.
Mortgage paymentprotection insurance. This optional accident, sickness
and unemployment cover is a
right royal rip-o. Lenders and
insurers make around £800 million
a year rom selling this over-priced
protection. Shop around or it (orcall a reputable insurance broker)
- you could cut your monthly
premiums by two-thirds, saving
you £50 a year.
Investments.You’d be mad to buy any
investment plans rom your
mortgage lender. Most have
super-high charges and inerior
investment returns. For long-term
investing over the long term,
we recommend an index tracker
wrapped up in a tax-ree ISA,
which is a simple, low-cost way
to grow your money in the stock
market.
Find lower premiums in ourInsurance Centre.
Watch out or
overpriced insurance
6No.
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7
Beware o ultra-low ratesA word to the wise: “Always stayout o handcus”. This goes orthe nancial kind, as well as thePolice variety!
Always be suspicious o nancialoers that look too good to betrue, because they’re sure to havea sting in the tail. For example,
take xed-rate mortgages thatoer ultra-low introductoryinterest rates. The only way that amortgage lender is going to giveyou a xed-rate deal that’s waybelow the Bank o England’s baserate is i it knows that it’ll makeits money back somehow.
For example, i you take out amortgage with a low xed rate o,say, under % or two years, youcan bet that you’ll be locked in ora long time ater your sweet deal
ends. Typically, heavy penaltieswill keep you tied in to a lender’sstandard variable rate or, say, veyears longer. So, your repaymentswill rocket and, i you want to buyyour reedom, you’ll have to handover a huge chunk o cash (knownas an ‘Early Repayment Charge’).
Ouch!So, beware o home loans whichhave nes that still apply ater yourspecial-rate deal has ended. I youwant to escape to a cheaper deal,these extended Early RepaymentCharges usually end up costingyou an arm and a leg. Think “short-term bargain, long-term misery”
and don’t be handcued to ahorrible home loan. Jam todayoten means trouble tomorrow, solook or hidden horrors in thesmall print!
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8
Sleep easier with a xed
or capped rateAlthough interest rates are low at
the moment, i they increase this
can still cause some discomort.
In 004 or example, the base
rate rose rom .75% to 4.75%
eectively increasing the cost o a
£100,000 interest-only mortgageby £8 a month.
I you don’t ancy a ride on the
interest-rate roller coaster, plump
or an aordable xed or capped
rate over, say, two to ve years.
Just watch out or extended Early
Repayment Charges (see tip
seven). Note that a xed rate is
guaranteed not to change over a
set period. However, a capped rate
means that your rate is variable,
but will not rise about a pre-set
ceiling (the ‘cap’) over an agreed
period. With a x or cap, at least
you know that you can aord to
meet your repayments or the
oreseeable uture - and you don’t
have to worry about interest-raterises or some time.
Many borrowers take great
comort rom the security o
knowing exactly what their
repayments will be or a while.
Many rst-time buyers choose
xed or capped rates to guarantee
their payments in the early years,
when they are adjusting to lie as
homeowners.No.
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The horror o hidden ees
9
When it comes to being a
homeowner, there are ar more
bills and costs than just your
monthly mortgage repayments!
For example, there are upront
and exit costs, including:
Solicitor’s ees
(or legal work, known asconveyancing)
Arrangement ees(also known as application or
booking ees), which can be £500
or more
Completion ees(paid when you draw down your
home loan)
Valuation or survey ees(rom the surveyor who values and
inspects your home)
Sealing and deeds ees(which you cough up when you
pay o your loan or switch to
another lender)
And, o course, EarlyRepayment Charges(see tip seven).
Another gruesome charge to
watch out or is a mortgage
indemnity premium (MIP), also
known as a mortgage indemnity
guarantee (MIG) or higher lending
charge (HLC).
Continued . . .
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I you want to borrow more than
three-quarters o the value o your
home, some lenders will charge
you a MIP. This is an insurance
premium that protects your lender
i you deault on your mortgage,
but has absolutely no nancial
value to you. So, you pay the
premium, but the policy onlyprotects the lender!
These days, decent lenders don’t
charge MIPs on mortgages o up
to nine-tenths (90%) o the value
o a property, reerred to as “90%
LTV (loan to value)”. So, i you have
a 10% deposit or own at least a
tenth o your current home, you
should be able to avoid paying a
MIP. And they are worth avoiding,because they can amount to
thousands o pounds. Skip the MIP,
because MIGs are pigs!
So, be warned: lenders advertise
headline rates prominently, while
tucking away any chunky charges
in the small print. Make sure you
look beyond the advertised rate tond those extra ees!
The horror o hidden ees
No.
9
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10
Finally, current account mortgages
(CAMs) combine your mortgage,
current and savings accounts
under one roo. By osetting the
credit balances in your current
and savings accounts against your
mortgage, your debt is reducedand you pay less interest. CAMs
are the pinnacle o mortgage
evolution, but they aren’t suitable
or everyone. This is because their
rates are higher than, say, Best
Buy discounted, xed, capped or
tracker rates. However, i you’re
nancially disciplined and have
substantial savings, they can be agreat way to bring orward your
mortgage-ree date.
That’s all or todayWe hope this guide helps you to
become a happier homeowner!
The benets o a
fexible mortgage
No.
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