Look before you book: don't just say yes to the first nice mortgage you meet

If you want to keep the repayments down, you could agree your next home loan in advance to catch falling rates. But beware of changing your mind later
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The Independent Online

Falling house prices and rising unemployment will be causing concern among some homeowners as the clock ticks down to the end of their current mortgage deals. The difference in their monthly repayments, the thinking goes, could also be the difference in whether or not they keep their houses. At the same time, they will be watching the sharp falls in the base rate and wondering how cheap their next loan might be

It's a point not lost on mortgage brokers, whose business has also been hit badly by the downturn. They have wasted no time in urging people to act fast in lining up the best deal.

Usually there would be no reason not to take the bait. Homeowners can reserve a rate being offered by a lender up to six months in advance, without paying a penny. And if something better comes along in the meantime, they can dump the first mortgage offer and go elsewhere – no strings attached.

But in the current climate, lenders are wising up, warns Louise Cuming, head of mortgages at comparison site Moneysupermarket.com. "The percentage of borrowers who went back on a mortgage agreement used to be tiny. But in recent weeks, with the base rate tumbling, an unprecedented number have wanted to back out."

And these days, not all lenders will let you walk away scot-free. "Any valuation fees for the mortgage are sometimes payable upfront and booking fees can also be charged to reserve the rate," says David Hollingworth at broker London & Country. "Cheltenham & Gloucester, for example, charges £99."

The Woolwich will not levy a booking fee on reserving a rate, but if you switch to a different deal with the lender as you draw near completion, it will cost £100. Strangely, though, you can dump both the deal and the lender itself with no financial penalty.

Other lenders will want part payment upfront. Yorkshire building society charges £195 of its £495 "product fee" on application, while HSBC levies all fees upfront and – for its tracker mortgages – Derbyshire Building Society does the same. "Every lender's policy is different but if you find a deal that's slightly cheaper than the one you have booked in, it may not be worth switching again," says Mr Hollingworth. "Either way, make sure you know exactly what the implications of changing your mind are."

And there can be plenty of time in which to change your mind as a mortgage offer is valid for between three and six months, depending on the lender. Some institutions, including the Abbey, may also impose a deadline by which time the mortgage must have reached completion. Fail to do so and the rate you agreed will no longer be valid and you will be left with whatever deals the lender has on offer at the time.

Having to put your money where your mouth is before completion raises the question of whether booking a rate even three months in advance is a little hasty? The recent savage cuts by the Bank of England would suggest not, but Darren Cook at financial analyst Moneyfacts says: "The indications are that the base rate will continue to fall, perhaps to as low as 1 per cent, but waiting until after this has happened to opt for a tracker mortgage [which shadows the base rate) is too late. This is because lenders anticipate rate cuts and simply reprice or pull their tracker deals altogether."

Cheltenham & Gloucester, Woolwich and Northern Rock, for example, all withdrew their tracker mortgages just hours before 1.5 percentage points were lopped off the base rate on 6 November, while Abbey increased the rates on its new tracker deals by 0.5 percentage points. Only by booking in advance could borrowers have benefited, says Mr Cook.

But such decisions are academic for the increasing number of borrowers whose loans have been pushed above the acceptable threshold among lenders of 90 per cent of the value of their home, due to high borrowing multiples and falling house prices. For these people, the only option is to revert to their existing lender's standard variable rate (SVR).

However, while SVRs are often reviled, they look far more competitive now in the light of the recent rate cuts. For example, borrowers at Nationwide who revert to its equivalent base mortgage rate will pay 4.69 per cent from 1 December, as opposed to the building society's old 6.19 per cent rate. Customers of the Halifax and Cheltenham & Gloucester will pay 5 per cent from that date.

"SVRs used to be something to avoid, but now borrowers can't wait to start paying them," says Mr Cook. "And as they come with no tie-ins or early repayment charges, they can be a perfect springboard from which to make a move on a fixed or tracker deal as they become more attractive."

But Mr Hollingworth adds: "If you need any level of certainty with your payments, an SVR won't provide it. People in this position should seek out the best fixed rate regardless."

At the other end of the scale, chasing every deal that is cheaper than the last is not a good idea either. Neil Munroe at credit reference agency Equifax says that before a lender gives you a formal mortgage offer, it will check your credit file; too many applications on your record – which can be construed as a sign of unreliability – and your chances of being accepted for a home loan may be scuppered. Using a mortgage broker who understands in advance what is required by each lender is a good way of reducing your "application footprint".

Bear in mind, however, that the best deals may only be available directly from the lender. For example, HSBC is currently a strong contender in the mortgage market, according to Ms Cuming, but it does not offer its mortgage deals through brokers. Other lenders, such as the Halifax and Cheltenham & Gloucester, can charge more for the same home loan when sourced through a broker.

Ray Boulger, senior technical manager at broker John Charcol, claims that this so-called "dual pricing" is no longer happening to the same extent. He adds that if the most suitable deal is not available through a broker, customers will be alerted to this anyway.

'We know what we've agreed is affordable'

Tim Wesson, 37, and his girlfriend, Sarah Tattersall, 29, have just received a mortgage offer from Abbey that kicks in at the start of next March. It is a three-year, fixed-rate deal priced at 5.74 per cent with a £995 arrangement fee.

"Neither of us is particularly financially savvy but we wanted to be sure we could afford our mortgage repayments when our two-year fix of 5.45 per cent with Bank of Scotland came to an end," says Tim, a self-employed graphic artist. "We went for some independent advice and found this deal, which looked good."

So far, the couple have not had to put down any money to retain the rate – and they don't have to pay London & Country either, as the broker is fee-free. "This enables us to be flexible on the agreement, and now the base rate has fallen to 3 per cent, we are keeping our eyes peeled for any cheaper deals," says Tim. "But the action we have taken to date at least allays our fears as we know we can afford what we've agreed."

The new deal will be secured against their three-bed house in south London, which they bought four years ago for £225,000 with a 12 per cent deposit.

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