Make sure you understand the whole range of mortgages available. You should be told about capital and interest mortgages and interest only mortgages as well as the different repayment vehicles such as endowment policies, ISA’s and pension mortgages.
This sounds obvious but you should make sure that you understand how long the initial interest rate will apply.
If the interest rate on offer is below the normal variable rate of the lender then you should make sure you know what will happen when this incentive rate runs out. Some fixed rate mortgages give you the option to fix for a further period at the end of the initial fixed rate period whilst others will be conditional on you reverting to the normal variable rate.
Find out what the lender charges as their normal variable rate and compare this with other lenders. There is no point in taking out a mortgage with a competitive rate initially if you then find that you are paying over the odds later on.
This again sounds an obvious question to ask but you would be surprised how many people do not ask the question ‘how much will the mortgage cost at the standard variable rate?’ Remember, no matter how cheap the mortgage is initially at some point you will have to pay at the normal rate so make sure you will be able to afford the mortgage when this happens. Furthermore, remember that the standard rate may be higher in two or three years time so make sure you leave yourself with some flexibility.
Ask about early redemption penalties and be particularly wary if these extend beyond the term of the initial fixed, capped or discounted period. If there are no penalties after the initial incentive period then you will be free to move your mortgage at the end of that time and will therefore me able to take advantage of other incentives available. If you are tied into the lender at the end of the initial period then you will probably have no choice and be forced to accept the normal variable rate.
Mortgage indemnity premiums have already been covered in this book but it is important that you establish the position at the outset. Mortgage indemnity premiums have in the past been charged whenever a mortgage went above 75% of the value of the property. However, many lenders have now raised the threshold to 90% of the value so there can be quite large discrepancies from one lender to another.
If there is an arrangement fee to pay find out how this is collected. Some lenders will ask you to pay the fee up front with the mortgage application whilst others will either add the fee to the mortgage debt or deduct it from the advance cheque when the mortgage completes. If the fee is payable up front ask if it will be refunded if the application does not proceed. Some lenders will retain the fee even if they decline your application so make sure that you understand the situation at the outset.
Find out what will happen if you decide to move to another property. This is particularly important if you are taking out a long term fixed, capped or discounted mortgage or if the redemption penalties last for a long period of time. Many lenders now make their mortgages portable which means that you can transfer the mortgage on the same terms and conditions to a different property if you decide to move.
Ask what conditions will apply if you wish to pay off part of the mortgage or accelerate your repayments.
Many of the very attractive rates available are made less attractive by the imposition of compulsory insurance. It is always the case that the lender will insist that you take out buildings insurance to cover the property but many lenders will also insist that you take this policy through them. This means that you are denied the opportunity to shop around for the best quote. If this is the case with the mortgage you are being offered then get a quote from the lender and see how competitive they are. If the premiums are in excess of those you can obtain elsewhere then take this into account when assessing the attractiveness of the deal. This becomes even more important if the lender is insisting on buildings and contents insurance and sometimes they will even make it a condition of the mortgage that you take out their accident, sickness and redundancy cover.
If you are talking to the lender directly then they will obviously only be providing advice on their own range of products. However, if you are talking to a broker you might assume that they are providing a complete overview of the entire market. This is not necessarily the case and the adviser may take on the status of an appointed agent of one lender or arrange mortgages from a selection of preferred lenders. Whatever, his or her status the Financial Services Act now imposes a requirement that you are told the status and if the adviser is using a selection of preferred lenders you should be given the details.
However, this is not always as straightforward as it might appear. The new rules state that in order for a broker to call himself ‘independent’ he must offer the customer the opportunity to pay a fee rather than receive commission. This means that he can call himself ‘independent’ even if he only sources his products from a selection of lenders providing that the selection is deemed to be a representative sample of the market. What this means is that he may not always have access to the very best products available in the market.
On the other hand a broker who sources his products from the market as a whole but who only works on a commission basis and does not offer the alternative of a fee paying service cannot describe himself as independent. It is important that you understand this distinction and ask the question ‘do you source your products from a panel of lenders or deal with every lender in the market?’
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