The Motley Fool Mortgage Guide

8/2/2019 The Motley Fool Mortgage Guide

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Mortgage Comparison Centre

Mortgage

Guide

10 Tips or aHappier

Home Loan

The Motley Fool

Visit The Motley Fool Mortgage Centre at: www.ool.co.uk/mortgages





The UK is oten reerred to as

‘a nation o homeowners’.

That’s hardly surprising, given

that nearly seven in ten o us

own a home, which is a ar higher

proportion o owner-occupiers

than in many European countries.

O course, the money to buyour nests has to come rom

somewhere, which is why around

1 million households have a

mortgage. At the end o 005,

British mortgage borrowers owed

a total o £965 billion, which

comes to an average o over

£8,000 per home.

Most o us take out a 5-year

mortgage, which we repay by

way o three hundred monthly

repayments. With interest-only

mortgages, you only pay interest

during these 5 years, ollowed

by one lump sum to pay o your

debt. With repayment mortgages,

you repay the debt as you go.

I you’re going to make the most

o your mortgage, you need to

minimise the amount o interest

that you pay (and the same

goes or other mortgage-related

expenses, too). This guide shows

you how to do just that - and

points out a ew pitalls to watchout or.

Introduction

10 Tips or aHappier

Home Loan





10 Tips or aHappier

Home Loan

ContentsNo. 1 Don’t over-stretch yoursel . . . . . . . . . . . . . . . . . . . . . . . . 4

No. 2 Loyalty costs you plenty. . . . . . . . . . . . . . . . . . . . . . . . . . 6

No. 3 Get the best mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . 7

No. 4 Interest-only or repayment? . . . . . . . . . . . . . . . . . . . . . . . 9

No. 5 The joys o over-paying . . . . . . . . . . . . . . . . . . . . . . . . . 10

No. 6 Watch out or overpriced insurance . . . . . . . . . . . . . . . . . 1

No. 7 Beware o ultra-low rates . . . . . . . . . . . . . . . . . . . . . . . . 14

No. 8 Sleep easier with a xed or capped rate. . . . . . . . . . . . . . . 15

No. 9 The horror o hidden ees . . . . . . . . . . . . . . . . . . . . . . . . 16

No. 10 The benets o a fexible mortgage . . . . . . . . . . . . . . . . . 18



Visit The Motley Fool Mortgage Centre at: www.ool.co.uk/mortgages 4


10 Tips or aHappier

Home Loan

Don’t over-stretch yoursel When you’re arranging a

mortgage, you need to be sure

that you can keep up your

repayments. I arrears begin to

pile up, you could end up losing

your home. You may have seen

this warning on literature rom

mortgage lenders, “Your home

is at risk i you do not keep up

repayments on a mortgage or

other loan secured on it.”

O course, the cost o your home

doesn’t stop at its price. There are

other upront costs to consider,

including stamp duty (an extra

1% to 4% o your purchase price),

survey and legal ees (around£1,500 or more). Also, your

mortgage repayment is just one

o a host o monthly expenses,

including insurance policies (lie,

sickness, buildings and contents,

etc.), Council Tax, maintenance

costs, utility bills and so on.

Here are three ways toreassure yoursel that

you’re not going to beover-stretched: The rst is to put down a large

deposit. I you have a 10% deposit,

you’re less likely to all into

negative equity (where your home

is worth less than your mortgage)

than someone who has a 100%

mortgage.

1 Continued . . .No.





10 Tips or aHappier

Home Loan

The second way is to limit yoursel

to borrowing, say, less than ½

times your income (or ½ times

a couple’s joint income). People

borrowing large multiples o their

salary (say, our times or greater)

have come a cropper in the past.

Thirdly, i your mortgagerepayments go up and down when

interest rates change, budget or a

% increase in rates. That way, you

won’t suer ‘payment shock’ when

interest rates eventually start to

climb.

In addition, double-check your

gures by listing all your income

and outgoings so that you know

how much income you have

spare to meet your mortgage

repayments.

One rule o thumb is not to

spend more than a third o yourdisposable income on your

mortgage. I your mortgage is

costing you more than hal o

your spare income, you don’t have

much room or manoeuvre

i things take a turn or the worse!

Don’t over-stretch yoursel

1No.





10 Tips or aHappier

Home Loan

2

Loyalty costs you plentyAlthough aithulness is to be

prized in other relationships,

it’s positively harmul when it

comes to your mortgage and

other nancial products!

Why limit yoursel to dealing with

a single mortgage lender, when

there are around 150 lenders eager

to do business with you?

In act, being loyal can cost you a

ortune. I you don’t have a special-

rate deal with your lender, you’re

likely to be paying its standard

variable rate (SVR). Generally, big

lenders charge an SVR around %

above the Bank o England’s base

rate. However, Best Buy variable-rate loans come in below the base

rate, which means a saving o %+

a year. On a £100,000 interest-only

loan, this means an extra £,000 a

year in your pocket.

One great strategy is to become

a ‘rate tart’, nding a better deal

whenever you can do so without

penalty. This approach should save

you tens o thousands o poundsover the lie o your mortgage.

No.





10 Tips or aHappier

Home Loan

3

Get the best mortgageAs the UK’s hyperactive housing

market slows down, lenders are

cutting each other’s throats to

tempt homeowners away rom

the competition. Re-mortgaging

is big business and can account or

up to hal o total lending.

Nevertheless, beore goingelsewhere, talk to your current

mortgage lender. All the major UK

lenders have a ‘turnaround’ team,

whose job it is to hang on

to your custom. I you have a good

payment history, you should be

able to squeeze a much better deal

rom your lender by threatening to

take your business elsewhere.

Ask or a settlement gure or

redemption statement - that’ll

grab their attention!

Beore you switch loan or lender,

nd out what incentives are on

oer. Many lenders provide ‘ee-

ree switching deals’ by paying

(or making a contribution towards)your valuation and legal ees.

Others oer cashback when you

draw down your loan. Typically,

these perks are worth £500 to

£1,500, which you should actor

into your calculations.

Continued . . .

No.





10 Tips or aHappier

Home Loan

I your existing lender won’t come

up with a winning deal, it’s time to

try the opposition.

Our Mortgage Centre is a good

place to start, as are the Best

Buy tables in the weekend

papers, Teletext or the website o

independent nancial researcherMoneyacts.

Also, or truly independent

advice, contact a reputable no-ee

mortgage broker, such as London

& Country Mortgages, Alexander

Hall, Clear Cut Mortgages or the

No Fee Mortgage Company.

These companies will nd the

deal that’s right or you by

searching through 8,000 home

loans or more.

You’d get several quotes rom

tradesmen beore choosing one, so

do the same with your home loan!

Get the best mortgage

3No.





10 Tips or aHappier

Home Loan

4

Interest-only or repayment?In the Eighties and Nineties,

the vast majority o mortgages

were interest-only loans.

This means that borrowers only

paid interest on the money they

owed, without chipping away

at their debt. In order to pay o

the debt ater 5 years, they

would invest money to producea lump sum.

Most people in this situation

were sold an endowment, which

combines lie insurance with

an investment plan. However,

in recent years, a combination

o high charges and depressed

investment returns has all butdestroyed the credibility that

endowments once had.

Nowadays, most people choose

to have a repayment mortgage,

where part o each monthly

repayment goes towards paying

o their loan. With a repayment

mortgage, you are guaranteed

to pay o your home loan,

assuming that you make all

your repayments on time.

I you’re worried about uture

investment returns, or have an

endowment that won’t clear your

mortgage, you could convert all

or part o your mortgage into a

repayment loan. Some lenders will

charge you a ee o around £150

to do this, but this may be worthpaying i you want to play it sae.

No.





10 Tips or aHappier

Home Loan

The joys o over-paying

5

Taxpayers who save money in

taxable savings accounts have to

pay tax on their interest: a th

(0%) or basic-rate taxpayers and

two-ths (40%) or the UK’s three

million higher-rate taxpayers.

So, a gross (pre-tax) rate o 5%,

would all to 4% or % ater tax

is deducted.

On the other hand, i you

overpay your mortgage, you

eectively ‘earn’ tax-ree interest

at your mortgage rate. So, i your

mortgage rate is, say, 6.75%, your

tax-ree return is also 6.75%.

To earn 6.75% in a taxed savings

account, you’d need to earn 8.44%

beore tax (11.5% i you’re a

higher-rate taxpayer). Since no

sae investment oers this kind o

return, ‘saving’ into your mortgage

can be a good idea. In act,

multi-billionaire investment guru

Warren Buett has remarked that,or most people, overpaying their

mortgage is the best nancial

move they can make.

Continued . . .No.





10 Tips or aHappier

Home Loan

5

The joys o over-payingWhat’s more, a borrower with a

£100,000 repayment mortgage,

paying a discounted rate o

4.75%, could cut his/her interest

bill by £11,96 by overpaying

£50 a month. Even better, this

overpayment means that the

mortgage term alls rom 5 years

to 1½ years, which means ½years more un in later lie!

Beore setting up a standing

order or dropping a lump sum

into your mortgage, check with

your lender to make sure that you

won’t be punished or doing so.

I you will be penalised, put the

money into a Best Buy savings

account and whack it into yourmortgage when you’re ree to

do so without penalty.

No.





10 Tips or aHappier

Home Loan

Watch out or

overpriced insuranceUK banks make billions o pounds

a year rom mortgage borrowers,

thanks to the interest on over £850

billion o mortgage debt. However,

they also make enormous sums

rom selling high-priced protection

to their borrowers.Mortgage lenders make it ‘easy

and convenient’ or you to buy

their own cover, oten collecting

the premiums with your monthly

mortgage repayments. But this

is simply a cunning trick to make

you orget that you’re over-paying

or this protection! For example,your mortgage lender may have

‘encouraged’ you to buy one or

more o these policies:

Lie insurance.I you bought this rom your

mortgage lender, your premiums

are probably three times as high

as they could be. Getting cheaper

cover will save you thousands

over the lie o your mortgage.Also, you don’t need this cover i

you’re young, ree and single, but

it’s essential i you have a partner

and/or dependent children.

Income protection(long-term sickness cover)

and critical illness insurance

(protection against cancer, heartattack, stroke and other serious

conditions). As above.6 Continued . . .

No.





10 Tips or aHappier

Home Loan

Home insurance(buildings and contents).

Another nice little earner or

mortgage lenders. Ignore any

sales patter, such as “our tailor-

made policy makes it easier to

claim”. Instead, switch and save.

Mortgage paymentprotection insurance. This optional accident, sickness

and unemployment cover is a

right royal rip-o. Lenders and

insurers make around £800 million

a year rom selling this over-priced

protection. Shop around or it (orcall a reputable insurance broker)

- you could cut your monthly

premiums by two-thirds, saving

you £50 a year.

Investments.You’d be mad to buy any

investment plans rom your

mortgage lender. Most have

super-high charges and inerior

investment returns. For long-term

investing over the long term,

we recommend an index tracker

wrapped up in a tax-ree ISA,

which is a simple, low-cost way

to grow your money in the stock

market.

Find lower premiums in ourInsurance Centre.

Watch out or

overpriced insurance

6No.





10 Tips or aHappier

Home Loan

7

Beware o ultra-low ratesA word to the wise: “Always stayout o handcus”. This goes orthe nancial kind, as well as thePolice variety!

Always be suspicious o nancialoers that look too good to betrue, because they’re sure to havea sting in the tail. For example,

take xed-rate mortgages thatoer ultra-low introductoryinterest rates. The only way that amortgage lender is going to giveyou a xed-rate deal that’s waybelow the Bank o England’s baserate is i it knows that it’ll makeits money back somehow.

For example, i you take out amortgage with a low xed rate o,say, under % or two years, youcan bet that you’ll be locked in ora long time ater your sweet deal

ends. Typically, heavy penaltieswill keep you tied in to a lender’sstandard variable rate or, say, veyears longer. So, your repaymentswill rocket and, i you want to buyyour reedom, you’ll have to handover a huge chunk o cash (knownas an ‘Early Repayment Charge’).

Ouch!So, beware o home loans whichhave nes that still apply ater yourspecial-rate deal has ended. I youwant to escape to a cheaper deal,these extended Early RepaymentCharges usually end up costingyou an arm and a leg. Think “short-term bargain, long-term misery”

and don’t be handcued to ahorrible home loan. Jam todayoten means trouble tomorrow, solook or hidden horrors in thesmall print!

No.





10 Tips or aHappier

Home Loan

8

Sleep easier with a xed

or capped rateAlthough interest rates are low at

the moment, i they increase this

can still cause some discomort.

In 004 or example, the base

rate rose rom .75% to 4.75%

eectively increasing the cost o a

£100,000 interest-only mortgageby £8 a month.

I you don’t ancy a ride on the

interest-rate roller coaster, plump

or an aordable xed or capped

rate over, say, two to ve years.

Just watch out or extended Early

Repayment Charges (see tip

seven). Note that a xed rate is

guaranteed not to change over a

set period. However, a capped rate

means that your rate is variable,

but will not rise about a pre-set

ceiling (the ‘cap’) over an agreed

period. With a x or cap, at least

you know that you can aord to

meet your repayments or the

oreseeable uture - and you don’t

have to worry about interest-raterises or some time.

Many borrowers take great

comort rom the security o

knowing exactly what their

repayments will be or a while.

Many rst-time buyers choose

xed or capped rates to guarantee

their payments in the early years,

when they are adjusting to lie as

homeowners.No.





10 Tips or aHappier

Home Loan

The horror o hidden ees

9

When it comes to being a

homeowner, there are ar more

bills and costs than just your

monthly mortgage repayments!

For example, there are upront

and exit costs, including:

Solicitor’s ees

(or legal work, known asconveyancing)

Arrangement ees(also known as application or

booking ees), which can be £500

or more

Completion ees(paid when you draw down your

home loan)

Valuation or survey ees(rom the surveyor who values and

inspects your home)

Sealing and deeds ees(which you cough up when you

pay o your loan or switch to

another lender)

And, o course, EarlyRepayment Charges(see tip seven).

Another gruesome charge to

watch out or is a mortgage

indemnity premium (MIP), also

known as a mortgage indemnity

guarantee (MIG) or higher lending

charge (HLC).

Continued . . .

No.





10 Tips or aHappier

Home Loan

I you want to borrow more than

three-quarters o the value o your

home, some lenders will charge

you a MIP. This is an insurance

premium that protects your lender

i you deault on your mortgage,

but has absolutely no nancial

value to you. So, you pay the

premium, but the policy onlyprotects the lender!

These days, decent lenders don’t

charge MIPs on mortgages o up

to nine-tenths (90%) o the value

o a property, reerred to as “90%

LTV (loan to value)”. So, i you have

a 10% deposit or own at least a

tenth o your current home, you

should be able to avoid paying a

MIP. And they are worth avoiding,because they can amount to

thousands o pounds. Skip the MIP,

because MIGs are pigs!

So, be warned: lenders advertise

headline rates prominently, while

tucking away any chunky charges

in the small print. Make sure you

look beyond the advertised rate tond those extra ees!

The horror o hidden ees

No.

9







10 Tips or aHappier

Home Loan

10

Finally, current account mortgages

(CAMs) combine your mortgage,

current and savings accounts

under one roo. By osetting the

credit balances in your current

and savings accounts against your

mortgage, your debt is reducedand you pay less interest. CAMs

are the pinnacle o mortgage

evolution, but they aren’t suitable

or everyone. This is because their

rates are higher than, say, Best

Buy discounted, xed, capped or

tracker rates. However, i you’re

nancially disciplined and have

substantial savings, they can be agreat way to bring orward your

mortgage-ree date.

That’s all or todayWe hope this guide helps you to

become a happier homeowner!

The benets o a

fexible mortgage

No.




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