FOOL SCHOOL
Homeowning: Finding A Mortgage Lender

May 10, 2002

With the advent of the Internet, the mortgage market is more competitive than ever. An online mortgage will typically be cheaper than one arranged through a branch or through a mortgage broker. As always it pays to shop around and compare a number of different quotations. To this end, there are a number of online mortgage providers advertising their wares in this home owning centre.

But when you deal with any mortgage provider then make sure you get the answers to these questions.

Will I have to pay a Mortgage Indemnity Guarantee and how much will it be?

Also known as the Lender's Risk Fee, this is a cunning trick that mortgage companies sometimes use to get you to pay for protecting them against the risk of you defaulting on your mortgage debt. They'll get their money - it'll just be the insurance company coming after you instead of the lender! Not all lenders charge this - and you should try to avoid it. It can amount to several hundred pounds, even for a typical mortgage. The payments are usually tacked on to your mortgage so you don't really realise just how expensive it is. You might find that you've got no option, though - if you haven't got a deposit and you're asking for a 100% mortgage, the lender has to cover itself in the event of falling house prices.

Will I be required to take out your home and contents insurance products as a condition of the mortgage?

Usually, insurance deals that are tied to the mortgage lender are much more expensive than those you can get on the High Street.

Are there any redemption penalties with this mortgage deal?

This isn't an up-front charge but one you may have to pay later should you wish to switch lenders. Often you will get a fixed, discounted or capped deal that lasts for a year or two and then you're locked in on the more expensive standard variable rate for a further couple of years or so. If you want out, you have to pay them to get out.

This is the infamous redemption penalty that everyone complains about. You should avoid these if at all possible, unless it's such a great deal that you don't mind being tied in for a while.

Is there an Arrangement Fee? How much will it be?

This is sometimes known as an Administration or Application fee and it's supposed to cover your lender's administrative costs for setting up the mortgage.

Usually, you'll be looking at about £200 and you'll be required to pay it up front. Ask at what point in the process they require it. Some may refund it when you're finally installed in the house but please note that you won't get it back if the deal falls through. Be aware that they like to confuse you with different terminology just to throw you off the scent about what they're actually charging you for! Sometimes it will include the cost of sending round a valuer to check that your proposed new home isn't going to fall down before you've paid the mortgage off. If it's not included there will be a separate Valuation Fee, so check what you get for your money!

How much is the Valuation Fee (if it's not included in the Arrangement Fee)?

Don't be surprised by the fact that your mortgage lender will want to know if your prospective purchase is worth at least as much as you want to borrow - regardless of defects. This is so they'll get their money back if you default on the mortgage. Strangely, they're highly unlikely to let you see the result of this mini-survey - in spite of the fact that you've paid for it! It's for their eyes only! Most lenders even have a non-disclosure clause, so you can't sue them if their surveyor has cocked up. It puts the onus on you to get your own survey done (at extra cost to you, of course!).

If you are satisfied with the answers, ask them if they'd be prepared to give you a mortgage and how much they'll consider lending you. Tell them you haven't found a house yet but that you would like to obtain a mortgage certificate.

A mortgage certificate is a good thing to have. It states how much a lender would be prepared to let you borrow (subject to the property you want to buy, of course) and it's usually valid for a couple of months. Most importantly, it provides proof to the estate agent and seller that you have the money to proceed. You'll have to fill in a few forms at this stage, detailing your income and financial commitments, but it's worth it. That mortgage certificate gives you an advantage over someone who may be after the same property as you -- but who has not got the necessary financing in place.

More: Homeowning Centre