Mortgage lenders are getting into the Christmas spirit by offering gifts including free valuations, free legal fees and even cashback on mortgages – but are these gifts really as generous as they seem? Emma Lunn finds out
Whichever lender or mortgage product you choose there will normally be a number of fees associated with the deal. These include arrangement fees for the administration involved in setting up the mortgage, valuation fees for a basic survey of the property and the lender’s legal fees. There may also be an exit or administration charge when you later redeem the mortgage. To persuade customers to opt for a particular deal, lenders often waive some of the fees. David Hollingworth of broker London & Country says finding the best mortgage is all a case of doing the sums and not just focusing on the headline rate or offer. “Arrangement fees have increased dramatically in recent years and can often amount to £1,000 or more,” he says. “In addition there will often be a valuation fee plus all the other ancillary costs such as legal fees. Deals that cover some or all of these costs will tend to have a higher interest rate but the lack of other fees can often work out cheaper overall, particularly for those with a more modest mortgage.” Find a new mortgage deal Some lenders offer completely free-free mortgages to first-time buyers. HSBC, for example, offers a fee-free lifetime tracker which is available on mortgages up to 90 per cent loan-to-value (LTV). There are no set-up fees or fees for leaving the mortgage, and it comes without early repayment charges, so borrowers are free to leave or remortgage whenever they choose. Meanwhile rival ING Direct offers a flexible mortgage with free valuation and legal fees, no higher lending charge, no charges for everyday administration; on top of that, customers can leave any time without penalty. Other lenders often have two rates for a certain product – one for fee-payers and one for people who choose not to pay a fee. However, mortgage lenders will normally recoup the cost of giving away something for free upfront by way of a higher rate. Find a best-buy mortgage Melanie Bien, associate director at mortgage broker Savills Private Finance, says that most borrowers realise they need to take into account the fees associated with a mortgage, as well as the rate, when comparing and choosing a mortgage. “However, some lenders have taken this to extremes by offering fee-free deals. While it can be attractive to think that you are getting something for nothing, this really isn't the case. If there is no fee, you pay for it in terms of a higher rate of interest. If the rate of interest is very high, you may have been better off paying a fee to get a cheaper rate,” she says. Bien cites the example of two Alliance & Leicester two-year fixed products - one at 5.48 per cent with a £1,999 fee, the other at 6.23 per cent with no fee. Using a £150,000 interest-only mortgage, on the 5.48 per cent deal you would pay £685 a month or £16,440 over the two-year period. With the 6.23 per cent deal, you would pay £779 a month or £18,690 over two years. So you would pay £2,250 more in payments on the no-fee deal, which means £251 more over two years once the fee has been deducted. Bien says: “It all depends on the size of your mortgage: as a general rule, the bigger the mortgage the more important the rate and the less important the fee.” If you cannot afford a fee upfront, it is usually possible to add it to the loan - although you will pay more in the long run because you will pay interest on this. But it may mean getting a really low rate of interest so it will benefit you in the long run. When you take out a mortgage for the first time or remortgage, you might be charged fees for work carried out by the lender. The lender’s valuation is a basic check of the property so that the mortgage lender can be sure it's worth what you're borrowing. It is done so the lender can be sure their loan is secure - i.e. if you default on the loan they can recoup their money by selling it. However it is normally the borrower that pays for the valuation to be done and a typical cost is around £150. Find out how much you can borrow When either purchasing a property or remortgaging, much of the legal work that has to be undertaken is at the behest of the mortgage lender in order to safeguard their interests. though it is the borrower who has to pay for the lender’s solicitor. However, because the remortgage market is very competitive, lenders will often include the cost of legal fees as a part of the package offered to encourage borrowers to choose their product – and some will include legals on purchases too. Bien says: “If you are remortgaging, a deal with free valuation and legal fees may be attractive as it keeps costs down. The important thing is to work out the total cost of the mortgage - rate plus fees - so that you can compare like with like. Don't get distracted by a freebie; you usually end up paying for it somewhere else.” Cashback deals are often aimed at first-time buyers who will need extra cash to buy things for their new home. However, the cash bonus is often subject to higher repayment rates and may include penalties for repaying the loan early. In most cases the customer will also be paying a higher rate. Calculate your mortgage repayments here Take, for example, the Royal Bank of Scotland’s three-year fixed rate. It comes with 1 per cent cashback and no arrangement fee and is fixed at 7.25 per cent. Someone with a £150,000 mortgage would pay £1,147.33 a month, which comes to a total of £41,303.88 over three years. The customer would get a £1,500 lump sum back on completion of the loan, meaning they really pay £39,803.88 over three years. The same customer would be better off on Skipton Building Society’s three-year tracker at 0.44 per cent above the base rate, giving an initial rate of 6.19 per cent. The product comes with an arrangement fee of £599. Assuming the rate did not change, the customer would end up paying £37,445.71 over three years, £2,358.16 less than the RBS deal, even taking the cashback into account. However, if the base rate fell the customer’s repayments would decrease too and, as the product is capped, the maximum rate they would pay would be 6.44 per cent. Some mortgages come with free mortgage payment protection insurance (MPPI). MPPI will pay your mortgage for a set period of time if you are unable to work due to accident, sickness or unemployment. MPPI policies have a 'benefit period' which is the length of time you can claim monthly payments for. This varies with different policies but is normally one or two years. The longer you want the cover for, the more expensive the monthly premium will be. Although getting this insurance for free with your mortgage might seem like a good deal, in most cases a competitive product can be found by shopping around. Sometimes MPPI might not be the best product for a customer – income protection might be better. This will cover a proportion of your income – rather than just your mortgage repayments - if you are unable to work for any of a number of reasons. Fee-free deals
Free valuations and legals
Cashbacks
A cashback mortgage provides a cash rebate on completion of the purchase. The sum is either a percentage of the mortgage amount or a fixed amount. Free insurance
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Date: 2nd, November, 2007 |
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