- Shop around. Small or obscure building societies and mortgage brokers often offer better rates than high street banks and building societies.
- Mutuality pays. Building societies generally offer a better mortgage deal than most banks, certainly on variable rates. And with some societies, there is the possibility of a demutualisation windfall if the society floats on the stockmarket or is taken over.
- Look beyond the headline rate. The initial interest rate quoted in tables or adverts may be temptingly, but also temporarily, low. Find out what rate you will pay when the special deal finishes.
- Check for redemption penalties. These are common on many types of mortgage, and make it expensive to switch out of a loan while they apply. They usually apply only for the term of a special deal, but they may extend beyond that term where the initial rate is particularly low, tying you into the lender’s standard variable rate for several years. Loans like this with extended penalties are not usually good value.
- Watch out for compulsory insurance. To qualify for some loans, you have to buy insurance from or through your lender, typically buildings or contents cover. You can invariably buy such cover more cheaply from another source. If you are considering such a deal, factor in additional interest of at least 0.25 per cent to reflect the price of an uncompetitive policy.
- Will you have to pay a MIG? If you are borrowing more than 90 per cent of the value of your home you may be asked to pay a mortgage indemnity guarantee (MIG) - sometimes called a ‘high lending fee’. This is a one-off payment that buys an insurance policy that will pay out if you get into mortgage arrears and the house is repossessed. But beware - this does nothing to protect you! Many lenders don’t charge a MIG any more - if it’s demanded from you, check whether you could get a better deal elsewhere.
- How often is interest calculated? Daily or monthly calculations work better than annual ones for borrowers who want to repay capital regularly. With annual interest any capital repayment made over a 12 month-period is only credited once a year, on a lender’s chosen anniversary. The interest you pay throughout the next 12 months relates to the sum owed at that earlier point. With daily or monthly interest, all capital repayments are credited as soon as they are made. This means that future interest you pay relates to the reduced sum still left outstanding. Because you owe less, you pay less interest.
- Check the minimum capital repayment to trigger a recalculation. Most lenders who calculate interest annually will do a recalculation if you pay in a big enough lump sum and ask for the calculation to be done. Find out what the minimum is - it may be just £100 or up to £1,000.
- Take all costs into account. When comparing mortgage costs, be sure to include application, legal and other fees. If the rate varies over the term of any special deal, work out what rate you will pay on average and use that in comparisons.
- Beware the stated APR (annual percentage rate). Depending on many hidden factors, a loan with a low APR may be more expensive overall than one with a higher APR
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Copyright The Financial Times Limited 2008
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