How do the deals rate?

The price war has led to some tempting offers - but watch out for the penalties
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The Independent Online
Earlier this month the Hinckley and Rugby building society started offering mortgages at just 0.2 per cent. But before you start queueing, bear in mind that this rate is only offered for the first 12 months of the loan, and you will need a 30 per cent deposit to put down on the home you are buying.

This deal is the latest in the seemingly unrelenting mortgage price war that has hit the high streets in the past couple of years. Seeing the supply of new borrowers drying up, lenders went after each other's existing borrowers, trying to tempt them to change lenders with offers of cash, free insurance, and lower rate interest rates.

There is a major proviso; most deals come with penalty clauses so that if you change lenders again within, say, five years, you will be charged a desertion penalty of up to six months' interest.

If you like the idea of having a rate that won't change then a fixed- rate mortgage is a good option. The shorter the fix, the lower the rate - but there is an argument for fixing at a higher rate for a much longer term. On the other hand there's no guarantee that rates will rise, and if you fix at the wrong time, you could be left with an unnecessarily high rate.

A sensible idea is to look at three- to five-year deals. If rates do then go in the "wrong" direction, at least you won't have to overpay for too long. Over three years, for instance, the N&P is offering a 6.15 per cent rate, while over five years Abbey National is offering house purchase loans at 7.89 per cent.

For a guaranteed saving on the standard mortgage rate, you should choose a discount mortgage. The shorter the discount period, the better the rate. But if the standard rate rises, say by one percentage point, then so will your discounted rate.

Cashbacks can be helpful in paying off the costs of setting up a mortgage. You pay the full mortgage interest rate but lenders will pay up to 6 per cent of your mortgage back to you in cash. But if you change lenders within the first five years of the loan, then the lender will demand the rebate back.

Last year the Government changed the benefit rules, which means that if you become unemployed now, you won't be able to ask the state for help with your mortgage repayments for nine months. Unemployment insurance will cover the shortfall and see you through some potentially difficult times.

One lender, the Skipton, offers free unemployment insurance throughout the term of the mortgage. Some offer it for the first few years. But it has become an important protection measure which, if you don't have a free offer, can prove quite expensive to fund yourself.

Other incentives offered by some lenders include free legal fees, a free valuation of the property or, in the case of the West Bromwich building society, pounds 100 cash to donate to a charity or community project of your choice.

SIMON READ

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