Let your feet do the talking

Borrowers no longer have to bear unfair mortgage deals, but the choice can be baffling
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The UK mortgage market is vast, almost 11 million home loans are now in force around the country. Rampant competition between lenders has spawned some very cheap deals - but many home-owners still put up with poor-value loans.

The UK mortgage market is vast, almost 11 million home loans are now in force around the country. Rampant competition between lenders has spawned some very cheap deals - but many home-owners still put up with poor-value loans.

The Consumers' Association this month highlighted 20 "scams" in the mortgage market. It says lenders' widespread practice of calculating interest annually rather than daily results in borrowers paying on debt they no longer owe while many mortgage providers discourage borrowers from repaying debt by setting high minimum limits for lump sums.

Increasingly, borrowers are voting with their feet. Neil Walkling of the Consumers' Association says the proportion who switch mortgage providers to get a better deal has grown massively over the past few years. "They are much more aware of the huge amounts of money they can save," he says.

But the bewildering array of mortgages on offer can turn choice into torture. "People think they're going to be ripped off, but the reality is, remortgaging is the simplest way of saving money," says Phillip Cartwright of brokers London & Country Mortgages. A home-owner with a £100,000 mortgage would save £40 a month by remortgaging to cut their rate of interest by one per cent.

But is the potential saving worth the initial cost of changing your lender? "It is a question of sitting down and doing the maths," says Siobhan Hotten of mortgage brokers John Charcol. Generally, the smaller the mortgage the less worthwhile remortgaging becomes.

The cost of switching lenders can be about £700. The new lender needs a valuation; there are solicitors' fees; arrangement fees in some cases, and sealing or administration fees to pay the old lender. But many lenders offer those who change to them financial incentives.

How to spot a good deal? "When most people are looking at mortgages, they tend to be swayed by the headline rate, but it's vital to look beyond at the terms and conditions," says Ms Hotten. Arrangement fees, completion fees, redemption penalties and compulsory insurance can all add up, and in some cases cancel out the benefit of a lower interest rate.

Many lenders charge an arrangement fee - as much as £300. On a £60,000 loan, this alone is equivalent to an extra half a percentage point on the rate of interest in the first year.

Mortgage Indemnity Premiums, or MIPs, can make a big difference to the value you get from your loan. Lenders often require borrowers to pay this one-off insurance premium if the sum they're borrowing is high in relation of the value of the property - known as the loan-to-value (LTV) ratio.

National Counties BS, for example, requires anyone borrowing over 75 per cent of the property value to pay a MIP. For someone borrowing £95,000 against a £100,000 house this would cost £1,500. But several lenders don't require MIPs, including Bradford & Bingley, Cheltenham & Gloucester, and still more who only demand it on loans over 90 per cent LTV.

You should look carefully at any redemption conditions. Many deals force you to pay a penalty if you pay off any capital, above the level agreed, before a certain date. Penalties are often so high they effectively stop you switching lenders for anything up to seven years. Even if you started with a competitive rate of interest, three years into the loan you may find yourself paying a variable rate above that charged elsewhere. In general, the lower the initial rate, the longer the tie-in.

Even if a product carries no redemption penalties, the lender's standard redemption conditions - for all its mortgages - may prove costly. Under the Britannia BS's rules, 40 days' interest is payable if a mortgage is repaid in the first two years. Bina Abel at Bradford & Bingley says: "Increasingly lenders are doing away with extended penalties, and there should be something in every lender's portfolio without long tie-ins."

It may be worth putting up with a tie-in, if you get some security on the rate. "Cashbacks wouldn't exist if it weren't for redemption penalties," says Ms Hotten. "They enable the initial rate to be very low, and this can give some borrowers the cash-flow advantage they need."

If you opt for a tie-in, it may be worth choosing a provider which allows you to pay off at least some of the loan. Abbey National lets borrowers reduce their loan by up to 10 per cent a year without penalty.

Flexible mortgages allow you to overpay or underpay and usually calculate interest on a daily basis, but if you do not make use of the options, it will not be worth the higher rates.

The Consumers' Association says you should collect and compare information from five lenders, including banks and building societies.

But beware. Those who took out a loan after October 1995 must wait nine months to get state help with their mortgage interest payments if they claim Income Support. Anyone whose mortgage started before that only has to wait eight weeks.

London & Country Mortgages, 01225 408000; John Charcol: 0171-611 7000

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