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Choosing The Best Mortgage for You
An estimated one million homeowners have mortgages coming up for annual
review in any given quarter. Are you one of them? If so, make this an
opportunity to ensure you've got the right mortgage...
1. Get the best mortgage deal for you - look
to remortgage from a standard variable rate to a best-buy mortgage. Now is
the time to do it when the annual mortgage review takes place especially if
any rate rises are kicking in. In 2005 for example, homeowners with an
average home loan had to find a further £1,097 a year to compensate for
2004's under-payments. You can save that and more by moving to a best-buy
rate. It is estimated that the difference in annual repayments between a
best-buy and the average standard variable rate mortgage is £2,100 a year.
Talk to a mortgage broker for a best-buy mortgage. They have access to a
fuller range of mortgages, including some that are not advertised publicly.
A best-buy mortgage is usually defined as one with the lowest interest rate.
You should take account of other features though, including; the length of
any offer period; rates after the offer period; arrangement fees; method of
interest calculations (daily to yearly); redemption penalties. A mortgage
that's ideal for one borrower may not suit another.
2. Fancy a fixed mortgage deal? Some homeowners prefer fixed rate deals.
These offer certainty. You know what you'll pay and when. In financial
terms, they are a gamble. You may be better or worse off depending on what
happens to interest rates in the duration. Many pundits predict interest
rates may start to come down slightly soon. You may wish to ask your broker
to calculate what you'll pay on the fixed rate compared to the current
variable rate; and then compared to slightly lower variable rates. Do your
calculations. Some advisers are suggesting that homeowners searching for
fixed rate deals wait a month or two before committing. Fixed mortgage deals
are based on 'swap rates'. These are city expectations of future base rates.
The two-year swap rates are going downwards; most recently from 4.98% to
4.9%. Fixed rate mortgages will come down further in the light of this
trend. As always, view the deal as an overall package. Short-term fixes are
wiser than long-term ones.
3. Watch for the lender's clawback. The media focus on mortgages with the
lowest initial rate. This is the basis for the best-buy charts. The public
concentrates on upfront mortgage rates too. Lenders know this. They compete
to offer a low start-off rate that will pull in homeowners. But these
lenders want to clawback what they are giving away, and as soon as possible.
This often starts immediately with a high arrangement fee. Many borrowers
ignore this. That's because it can often be added into the mortgage;
incurring not only the high arrangement fee but interest on it. As a rule,
the lower the initial interest rate, the higher the arrangement fee. And the
lower the borrowings, the bigger the impact on the overall cost. After the
initial offer period ends, the borrowers then usually have to stay for a set
period on the standard variable rate. If they do not, they have to pay
redemption penalties. Don't just look at the opening rate - look too at
lock-in periods, variable rates and redemption penalties.
4. Discussing a discount mortgage? More and more homeowners are now opting
for a discount deal. These certainly offer savings compared to the standard
variable rate. Some homeowners still worry about the 'what if?' factor
regarding rate rises and falls. Those deals that track the standard variable
rate or Bank of England base rates may be the solution. As always, consider
the whole package, not just the initial rate. Going for a short-term deal of
a year or two may be wiser in an uncertain market. Discount mortgages have
had a bad press lately; unfairly so. The stories suggest that these can cost
you more than they should. If you review your mortgage and switch regularly,
discount mortgages offer you best-buy potential. If you simply go on to the
standard variable rate when the discount period ends you will lose what
you've saved and more. Research from Egg, the online bank, shows that
borrowers with discount mortgages have to remortgage within 14 months of
switching to the higher rate to avoid losing the discount savings.
5. Other tips and tactics? Generally, avoid annual reviews. These are
usually optional and you can change as and when you want. Annual reviews
have provided a false sense of security for many borrowers through 2004.
Expect to see plenty of shock-horror headlines in the national press this
month. Check that you can make overpayments if you wish to do so. Making
lots of little overpayments can reduce the term of your mortgage with
minimal effort. But look for a mortgage that calculates interest on a daily
basis rather than an annual one. With annual calculations, any overpayments
made shortly afterwards won't be taken into account until nearly one year
later. You're giving your lender an interest-free loan! Always read the
small print of every mortgage offer - it's where you will find any catches.
Do check for redemption penalties. Circumstances change and you may want to
settle the mortgage sooner than you think. Always remember that everyone is
different and there is no such thing as a 'best-buy mortgage' for everyone.
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