Money: Deals that are as safe as houses
In the first of a series on finding the right mortgage, plots a route through the bewildering variety of deals on offer in the market
Wednesday 19 August 1998
There are now around 1,600 mortgage deals on the market. In theory, competition brings costs down, so this should be in the interests of the borrower. But terms can be complicated and confusing.
The stakes are high. Choosing an expensive deal could mean paying thousands of pounds more than necessary. For example, research from the Consumers Association shows that building societies that converted to banks can charge higher rates. On a pounds 50,000 loan, people paying the standard variable rate with the Abbey National, Alliance & Leicester, Bristol & West, Halifax, Northern Rock and Woolwich paid between pounds 367 and pounds 441 more during 1996 and 1997 than similar borrowers with Yorkshire Building Society, the association says.
The first step with a mortgage is to work out how much to borrow. As a rule, lenders will not lend more than three times your gross salary. Couples can either borrow up to 2.75 times their joint income, or three times the higher salary plus one times the lower.
"A lender will not lend you more than you can afford to repay, but, if you want to be more comfortable than that, you might want to borrow less," says Pam O'Keeffe, of the Building Societies' Association.
If you need the security of knowing exactly how much the mortgage payments are going to be every month, fixed-rate mortgages can be a good idea. Capped rates put a ceiling on the interest rate you pay, while allowing you to take advantage of any falls in rates.
If you opt for the standard variable rate, the lender may offer an incentive in the form of "cashback". But bear in mind just how much interest rates could rise and how this would inflate your monthly payments.
Flexible mortgages are relatively new, but can be ideal given changing work patterns. If you suddenly decide to start a business or take maternity leave, this type of mortgage could give you a break from payments for a few months.
Should you opt for a repayment mortgage or an interest-only loan? Interest- only mortgages are usually coupled with an investment vehicle which you pay into at the same time. This might be an endowment policy, a PEP or a pension plan and is designed to repay the capital at the end of the term. One of the main attractions here is the hope that the investment could perform so well that you end up with an extra lump sum.
Endowment mortgages were particularly popular in the Eighties. However, problems have since emerged - investment returns have not been as high as some insurance companies forecast, and many policy-holders have now been asked to increase premiums.
The more straightforward repayment mortgages are making a comeback. According to Siobhan Hotten, who is marketing manager at the independent financial advisers John Charcol, this is partly because the choice of investment vehicle is becoming more limited, with PEPs due to be replaced by investment savings accounts next April.
Whichever deal attracts you, check the small print, as many lenders charge onerous penalties if you pay off any extra capital early. Remortgaging often makes sense in today's marketplace, and being tied to one mortgage by the threat of penalties can leave you paying interest at a rate that is no longer competitive.
Whether taking out a first mortgage or remortgaging, getting independent advice saves a lot of legwork. Independent advisers or specialist mortgage brokers have information on every deal going through computer networks.
But how objective is their advice? Could they be swayed by the commission they receive on investment vehicles such as endowment policies? Some advisers work on the basis that you pay them a fee, and the Consumers Association says its research showed that these advisers were most likely to offer unbiased advice.
John Charcol charges a fee of up to 1 per cent of the loan amount, depending how complex the case is. "Where we do earn commission, we'd generally discount the commission from the fee," says Ms Hotten.
The Council of Mortgage Lenders has published a code of practice. Under its terms, mortgage advisers have to say what level of advice they are giving. Where they recommend a particular mortgage, they should give written reasons. Check if your adviser has signed up to the code.
You can do your own research. The personal finance pages of The Independent on Saturday and The Independent on Sunday contain lists of the best mortgage rates on offer. Financial data publication MoneyFacts contains detailed information on individual deals.
`MoneyFacts': 01603 476100; John Charcol: 0171-611 7000; Council of Mortgage Lenders: 0171-437 0655
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