FOOL SCHOOL
Tricks Of The Mortgage Trade

May 9, 2003

Mortgage lenders obviously make their money by charging you interest on the money you borrow. But they've got to catch you before they can reel you in! They do this by offering you various short-lived inducements, which may or may not be of value to you depending on your circumstances.

Cashback

Some of the instant inducements include the offer of a lump sum in cash once the forms are signed. The 'cashback', as it's called, can obviously be useful if you haven't got any spare money to pay for furniture or legal fees or moving costs. However, as always, watch out for the small print. Some providers reserve the right to claim part of this money back if you switch mortgages within a certain timescale.

Fees

Sometimes a lender will pay some, or all, of the legal or arrangement fees -- perhaps even the cost of a survey on the property you're buying. In such cases you are likely to be lumbered with the lender's standard variable rate of interest -- so you could end up paying over the odds in the long run. Nevertheless, this can be a good short-term solution to a lack of immediate funds -- particularly when you're trying to contend with all the costs of buying a home and haven't got quite enough!

One fee to avoid is the Mortgage Indemnity Guarantee (often referred to as MIG). This is an insurance policy for the lender, that pays out if you default on your loan. However, some lenders ask you to pay the premium for them. Our tip - look for another lender.

Interest Calculations

Find out how your lender charges interest on your loan. Do they calculate interest based upon the outstanding value of your mortgage at the start of the year (which makes it more expensive for you) or do they calculate the interest due on a daily basis? This is especially important if you plan make overpayments on your mortgage as it could be up to twelve months before you get charged less interest. 

Redemption Penalties

Once the lender has reeled you in, they might then try to tie you in beyond the term of whatever special deal they've used to entice you through the door in the first place. You could get a reduced rate of interest for two years, for example, but subsequently find you're locked in for a further three years on their standard interest rate. This means that if you do try to switch to a better deal during the lock-in period, you'll have to pay a redemption penalty to get out. Either way, it's going to cost you. Ideally, go for a mortgage which has no redemption penalties once the introductory deal has expired.

Home Insurance

Watch out for lenders who try to sell you their home insurance when you take out a mortgage. Lenders get big commissions from their chosen insurance company and you will undoubtedly be paying over the odds if you go for a mortgage from someone who requires you to insure your property through them. It's far better, and usually much cheaper, to go for house insurance directly from an insurance company. One of the main rules to remember with financial products is that bundled products, such as a mortgage tied to home insurance, usually offer poorer value than getting each product separately. In effect, you pay a higher price for the convenience.

Follow these links for more details about home and contents insurance.

Life Assurance

Life assurance is a product that pays out a lump sum in the event of your death. Some mortgage providers will insist that you take out a life assurance policy to cover the value of your mortgage. Others will not. So this may be an additional cost you have to factor into your calculations. There is more about life assurance, such as how to decide whether you need it, in our insurance centre.

Mortgage Payment Protection Insurance

This is a form of insurance designed to help you pay your mortgage if you become unemployed, have an accident, or fall seriously ill. It's an expensive product anyway (see this article) and, the more circumstances you wish to cover, the more expensive it becomes! Remember that bundled products are typically more expensive than those bought separately. If you feel you need this cover then you are likely to find it cheaper from someone other than your mortgage provider. There is more on income protection insurance here.

Keep An Eye On The Latest Rates

The mortgage market is a fast-moving place. A deal that was competitive when you took it out may not be so attractive a few years down the line. So it pays to keep an eye on the latest offers available. Very often you can save hundreds, or even thousands of pounds, each year by remortgaging. Mortgage lenders make a lot of their money from the fact that most of us are too lazy to hunt for a more competitive deal.

For more on mortgages and the homebuying process check out our mortgage centre.