Personal Finance: How to find a home loan you can live with
Sunday 13 September 1998
Fixed-rate mortgages are still popular and they are great for those who want the certainty of knowing exactly what their repayments will be each month. But if you think interest rates are likely to fall then you might want a different sort of mortgage. Jock Cassidy, marketing director at Ashley Law, an independent financial adviser, thinks capped-rate mortgages are a better deal. "These put a maximum payment level on your repayments but also have the advantage that if interest rates fall, your repayments will drop to reflect this," he says
The typical five-year fixed-rate mortgage is around 6.5 per cent. If you pull out of the deal before the fixed-rate period is over you will probably have to pay a redemption penalty. This can be equivalent to six months' interest or a percentage of the amount you have borrowed. If you take a lower-rate fix for three years, you may have to move on to standard rates for a year or two years at the end of the fix period. This is how the lender makes its money.
There are good reasons to consider a three-year fix if you need to keep mortgage payments as low as possible now. Simon Tyler, the managing director of Chase de Vere, an independent mortgage adviser, says: "Some people prefer to fix for three years and get a cheaper mortgage now. You can get 5.5 per cent on a three-year deal. It is a brave choice but when you come out of this we will be just ahead of an election." The combination of generally lower interest rates and an election should mean that borrowers will not face a huge leap when they move on to standard variable mortgage rates.
As with all mortgage deals you should check how much the arrangement fee is and if you are required to take the lenders' building and contents' insurance. Insurance bought this way is almost always more expensive than if you arranged it yourself and so you need to take the extra cost into consideration.
If you think interest rates have peaked and will fall in the future then a discounted standard variable rate (SVR) mortgage or a capped mortgage may be the best option. There are plenty of good discounts but remember to look at the SVR as well as the size of the discount.
A capped rate will also apply for a set period of time, typically three or five years, and usually there are redemption penalties if you change lenders. Most only have redemption penalties for the period of the capped rate, but others do not. Among the most attractive deals is Yorkshire Building Society's five-year capped rate of 6.59 per cent on loans up to 75 per cent. It has an arrangement fee of pounds 220. John Charcol also offers a 6.59 per cent capped rate mortgage up to the end of September 2003. The arrangement fee is pounds 295 but the deal is available on loans up to 95 per cent.
A flexible mortgage deal is likely to have a slightly below-average standard interest rate and you have the chance to pay off lump sums, miss repayments and overpay. The capital outstanding on the mortgage is recalculated on a daily or monthly basis. Current deals range from 8.1 per cent to 9.25 per cent and some lenders also offer fixed, capped and discounted flexible loans.
Contacts: Bank of Ireland Mortgages, 0800 109010; Birmingham Midshires MSL, 01344 394008; Bristol & West, 0800 7317474; Chase de Vere, 0171- 930 7242; Halifax, 0800 101110; John Charcol, 0171-611 7000; Woolwich, 0645 757575; Yorkshire, 0541 576657.
Some of the top mortgage deals on the market
Lender Rate(%) Until Fee(?) Early redemption penalty
Bank of Ireland Mortgages 4.49 1/9/00 pounds 280 6 months' interest to 1/9/03
John Charcol 6.35 3/9/01 pounds 250 6 months' interest at fixed rate to 3/9/01
Halifax 5.253 1/12/00 pounds 295 5% reducing to 2% to 31/12/03
Bristol & West 5.99 1/9/01 pounds 295 6 months' interest until 31/8/03
Birmingham Midshires MSL 6.64 30/9/03 pounds 295 6 months' interest in first 5 years
John Charcol 6.99 1/10/03 pounds 300 None
Woolwich 6.75 1/9/03 pounds 195 6 months' interest until 1/9/03
John Charcol 6.99 1/10/03 pounds 295 6 months' interest to 1/10/03
Lender Rate (SVR) Discount until Redemption penalties
Halifax 8.95% 3.05% to 31/12/00 2% to 31/12/99, 4% to 1/12/01,
3% to 31/12/02, 1% to 31/12/03
Nationwide 8.50% 1.4% for 2 years None
Coventry 8.95% 3.95% to 20/9/00 12 months' interest before 30/9/00,
6 months to 30/9/03
Alliance & Leicester 8.85% 1.5% to 1/10/01 None
Nationwide 8.5% 1.15% for 3 years None
Nationwide 8.5% 1.35% for 5 years Repay discount in first 5 years
Nationwide 8.5% 0.95% for 5 years None
Source: John Charcol
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