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The Painful Truth
Affordable period homes - and a convenient local - in Inwood Park, Hounslow, west London.Lenders have borrowers coming, and going. Literally.
We pay fees to apply for a mortgage, we pay interest during the term of the loan, and we usually pay one or more fees when we pay it all off. And if we redeem the mortgage early - before the end of the agreed term - the penalty fee can be eye-watering.
STOP PRESS, 5 JANUARY 2009 Homeowners struggling with mortgage payments may qualify for government help. The Support for Mortgage Interest (SMI) scheme used to have a £100,000 limit but has been widened to now include mortgages up to £200,000. The waiting period has also been reduced to 13 weeks.
STOP PRESS, 13 DECEMBER 2008 If the value of your home drops beyond a certain point, you may be obligated to pay your lender a tidy lump sum to narrow the gap.
With house prices falling, some borrowers started owing more than 90% of the value of the property. Consequently, the bank has the right to demand payment to bring the figure back down to 90%.
In such cases, borrowers might have to find thousands of pounds in addition to their normal mortgage payment.
When this news story broke, the bank in question waived its right to insist on payment, but the right remains, and other lenders may not be so lenient.
This story highlights the importance of:
a) reading and really understanding mortgage terminology and the small print, and
b) taking a mortgage you can comfortably afford - so you can draw on financial reserves if needed.
The trick is to find the mortgage with the right combination of interest rate charges, fees and other costs and conditions.
Finding the right mortgage is problematic for several reasons. For one thing, wading through the enormous number of different loans on the market is difficult and time consuming. For another, the maths can be tricky.
But consumers who master a few basic concepts and terms can help their financial cause enormously. If you choose your mortgage wisely, you can save thousands of pounds. It is well worth the effort to improve your chances of making the best selection.
Hand in the Keys? Beach Yourself at Beachy Head???
If your money woes are so bad that you are tempted to hand in the keys, think again. Many desperate homeowners can negotiate lower monthly payments, even significantly lower payments: in some cases, lenders are obligated to meet them halfway. In addition, running away from home doesn't mean you get rid of the debt. It stays with you; it follows you around; it can catch up to you even many years later.
Sale and Rent Back? On the surface, it looks good: you can no longer afford mortgage payments, so you sell to someone who assures you that you can remain in the property as a tenant? Some desperate owners who have gone this route have received no payment at all - and been summarily evicted.
The charity Shelter has helpful information concerning so-called "mortgage rescue schemes". The government also has something to say on this question. (Links open in new windows.)
This is a complicated area of finance, law and regulation. Fortunately, free expert advice is available from organisations such as National Debtline, CCCS (Consumer Credit Counselling Service), Citizens Advice Bureau and the Financial Services Administration. An FSA brochure - "No selling. No jargon. Just the facts about what to do when you can’t pay your mortgage - is available on, and can be downloaded from, the FSA website.
WARNING: If you get a "pop-up" allowing you to link to these sites, do NOT use it. It may link you to a phoney site that looks like the real thing. Use a reputable link or key in the correct website URL (address) yourself.
Talking about bloat and bubbles...
Until the credit crunch in early 2008, some 10,000 different mortgages were available. But as credit tightened—as banks became unwilling, unable, or simply too scared, to lend—the number of mortgages on the market started dwindling.
Consider subprime mortgages alone. Julia Harris, mortgage analyst at MoneyFacts, notes that in the year from March 2007, the number of subprime mortgages on the market dropped a full 71%. Even with a decline on that scale, 1,867 mortgages remained.
Start here?
The first step that many people take, and it is a logical one, is to have a chat with the mortgage adviser in the bank or building society where they already have an account. Choice will be limited to the mortgages offered by that particular bank or building society, but most lenders have several different loans, and some have dozens.
Or use an intermediary?
Independent financial advisers (IFAs) and mortgage brokers have access to the wider market, although some are tied, which means that your choice will be limited to the firms with which they do business. (It also means that they are not as 'independent' as their title suggests.)
Some are "whole of market" and offer much wider choice, although they may not troll through the entire marketplace each time they search for a loan. Mortgage brokers usually provide a free initial consultation. They also tend to have encyclopaedic knowledge of the market, including the small-print terms and conditions that often really determine the true cost of a loan.
Who Pays the Piper?
You do. Even when you think the service is absolutely free, you pay.
Here's how it works. An IFA may arrange your mortgage and not present a bill at the end. The IFA will be reimbursed by the lender. Indeed, they will be reimbursed, quite handsomely, and quite quickly. Their income ultimately comes from the fees and interest and other charges that you pay over the course of the loan.
Might such an IFA be tempted to suggest a loan that gives him or her a bigger payout?
Yes, that temptation is there.
The main alternative is for you to pay the adviser on an hourly basis for advice. You may end up paying, say, between £300 and £600 for the advice, but you should save at least that amount, and often much more, because the loan he arranges will be cheaper for you over the long term. In such instances, your adviser has access to the whole market and has no direct personal interest in recommending one loan over another.
Here's An Offer You Really Shouldn't Refuse
Abundant mortgage and personal finance information is available, much of it free of charge, on the Internet and in local banks, building societies, bookstores and libraries. PWP's Mortgage Info details some of the best sources of financial information.
Look Mum, No Hands
Mortgage details are frankly a pain, and that is before you get to the small print detailing the crucial terms and conditions. Some people surrender early and pick the loan that smells the best. Others leave the decision to an adviser. But you can't, and shouldn't, run away from the whole thing.
For one thing, it is not all maths. Many mortgage-related questions are actually about you and your lifestyle. How long do you expect to live in the property? What are your future salary prospects? Any inheritance likely? What is your attitude toward risk? You and your advisor need to know the answers to such questions in order to determine the best kind of loan for you - for example, how long your initial low-rate term should be.
Even if you leave all the decisions to your financial adviser, there is another good reason for learning as much as you can. If you are not familiar with the basic concepts, you will probably struggle to understand the mortgage that has been arranged for you, and the reasons behind that decision. You will not be able to fully evaluate it, or to choose between competing options.
When One Plus One Equals Three
Monthly charges for one loan may be considerably higher than another loan but may actually be cheaper for you. Here's how it works:
In addition to paying interest on a monthly basis, you pay various fees, and the fees on seemingly cheaper loans are generally higher than for dearer mortgages. The bottom line is literally the bottom line: if you are comparing two mortgages, you should add up all of the costs for each.
Key Facts
Mortgages and mortgage offers should come with a Key Facts Illustration highlighting the main points of the offer. The KFI provides valuable information in and of itself and is useful in another way: if you like what you see in the KFI and it conflicts with the details in the small print, the KFI prevails.
The Small Print
Mortgage terms and conditions are numerous and complicated - and detailed mainly in the small print. If you don't read all of Terms and Conditions - and few of us do - at least make sure you know the main points: for example, when will the fixed rate become variable?; what are the penalties if you pay off the loan early?; can you have payment holidays? can you make additional payments and, if yes, when are they credited to your account?
Small Print - Tracker example
Tracker mortgages track- hence their name - base interest rates. If the interest rate rises, your rate rises, and if the interest rate falls, your rate falls. But when does the rise or fall apply to your specific account? The small print will tell you if your lender applies the change immediately or later, possibly six or more months later.
If rates drop and your lender does not apply the reduction for six months, you can be overpaying hundreds of pounds per month. Even if you are credited later, you might want or need the saving today. An alternate way of saying the same thing: if your lender applies the reduction immediately, you can save hundreds of pounds.
The True Cost of 'Free'
Many mortgage deals include freebies: maybe the lender will do your conveyancing for free, or waive one or more fees. But these freebies represent a good deal only if the rest of the mortgage is also a good deal. A mortgage with no freebies at all but with a lower interest rate, for example, may be cheaper than a freebie-laden loan.
APR, ERC, HLC
Annual Percentage Rate. Early Redemption Charge. Higher Lending Charge. Loan-to-Value (LTV). Mortgage Indemnity Guarantee (MIG). Drop Lock.
More information and definitions: Mortgages Basics, Mortgages for Beginners and Mortgage Terms.
Calculators
How much of a mortgage can you get with your income and assets? Easy: go to the website of a lender, find their mortgage calculator, key in your numbers and, with a mouse click, get your answer.
How much will you pay monthly on a mortgage of £50,000 (or £100,000 or whatever) at 5% (or 5.25% or whatever)? Easy: find an interest-rate mortgage calculator and key in the numbers.
Calculators abound. They are in money/property books and magazines, where you do the maths yourself. More conveniently, they are all over the internet: they do all the hard work quickly and easily. More information is available in Calculators.
Make Sure You Include Fees
For the privilege of taking out a mortgage, the lender may charge you an Arrangement Fee. It might have a different name - Booking Fee or Reservation Fee - but by any other name, a fee is a fee. And some arrangement fees are more than £1,000. Fees can make an apparently cheap mortgage more expensive than one that looks pricey on the surface. In comparing one mortgage against another, you must consider these fees. In the last few years, arrangement fees have risen sharply. For more information, see Fees and Fees, Fees, Fees.
Buying New? "Disclosure of Incentives"
Developers of new properties sometimes give buyers one or more incentives: rental guarantees, a mortgage subsidy, cashback or other goody. Such incentives can make it difficult to obtain an accurate valuation of the property. To increase valuation accuracy, developers must submit a Disclosure of Incentive form to the lender's surveyor or solicitor. The Council of Mortgage Lenders, which helped develop the form, has more information and warns against a scam to sidestep this disclosure.
Mortgage Regulations and Complaints
Since October 2004 all mortgage lenders have to be authorised by the Financial Services Authority (FSA) and need specific permission to lend on mortgages. The FSA also requires all mortgage lending activity to include specific disclosure of the main features of the loan.
Customers can complain, free of charge, to the Financial Ombudsman Service (FOS) and may receive compensation from the Financial Services Compensation Scheme (FSCS). The decision of the Ombudsman is binding on a company but not on individuals. If you are unhappy with the Ombudsman's findings, you can still take your case to court.