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5 Mortgage Tips
Mortgages or buying a house can often be the most expensive financial undertaking for an individual over their lifetime. It is therefore critical that they are aware of common pitfalls and unforeseen costs when buying a house and obtaining a loan to finance the purchase. Here are six common borrowing traps that can be avoided.
1. Avoid Expensive Arrangement Fees
A lot of banks (not all of them) levy a charge for the cost of arranging mortgages. These charges can run hundreds if not thousands of dollars. Borrowers who manage to obtain low interest mortgages should be careful to find out whether the loan comes with a large arrangement fee which could easily make redundant any savings made from paying a low interest rate.
Arrangement fees that are charged as a percentage of the total loan should in particular be avoided, and the fee for that type of loan can be nothing short of extortionate.
If the lender provides the option and the borrower has the ability, then individuals should try and pay the fee in advance instead of allowing it to be combined with the loan and attracting interest. However borrowers should be extremely careful, and should read the fine print before they pay the fee. Some banks will keep the fee despite rejecting the applicant for a loan, so individuals should make sure what the lenders policy is before paying a fee in advance.
2. Avoid Paying The Higher Lending Charge
Individuals who want to borrow a high proportion of the property value they are financing (known as high loan to value) may end up being required to pay a higher lending charge, which compensates the bank for the increased risk exposure they have.
For example an individual who has the ability to make a 10 per cent down payment and needs finance the other 90 per cent of the purchase has a high loan to value, and such a loan may attract the higher lending charge.
HLC’s are expensive, and a little unfair since high LTV’s tend to incur higher interest rates to begin with, which should more than compensate the lender for the increased risk, without requiring the borrower to pay an additional charge.
The best way to counter such charges is increase the amount of deposit, perhaps defer the purchase until the individual can finance a greater proportion of the loan, themselves.
3. Be Aware Of Extended Early Repayment Charges (ERCs)
A lot of mortgage loans come with an ERC attached targeted at those borrowers who manage to pay off their loan early or decide they want to refinance and move the debt onto another lenders books.
Some banks levy ERC’s even longer than they offer the special rate deals and borrowers should actively seek to avoid these kind of loans. ERC’s which have long periods of validity basically hold the borrower to ransom, allowing the lender to set rates without giving the borrower the ability to refinance without triggering the charge.
Therefore though it can be tempting to overpay ones mortgage, borrowers should be careful by how much they do so lest they trigger an unnecessary charge.
4. Understand The Standard Variable Rate (SVR)
Standard Variable Rates (SVR), is the floating rate of interest that the lender charges once the introductory interest rate ceases to be applicable. SVR mortgages are a good deal when the central bank cuts official interest rates as it has done of late and can save the borrower a good deal of money., But they are double edged swords and when the central bank begins raising rates as they are likely to do shortly, then SVR’s can cause substantial increases in the monthly payment.
5. Do Not Use Mortgage Payment Holidays
Mortgage payment holidays may seem like a good way to bridge the gap for those struggling to meet their financial commitments, but this should be a last case solution for people who are struggling.
Payment holidays are not entirely cracked up to be what their name suggests and the true cost can be extremely expensive.
Though the capital payment is suspended, the interest incurred is added to the mortgage, increasing the amount owed to the lender, which is compounding. For every payment that is skipped, the interest amount increases because the amount owed to the lender has increased during the payment holiday. Therefore payment holidays should be used only when the borrower’s finances are dire, and are not a cost effective means for trying to get expenses under control.
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Excellent post.
I’m looking at buying a house myself at the minute and I had been looking at a low interest fixed rate mortgage with a hefty fee at the start but will now think again!