Posted: Tue May 08, 2007 9:50 am
Beware of mousetrap mortgages
Elizabeth Colman says that borrowers must do their sums before taking the bait of a low interest rate or a fee-free deal
Fancy a glittering mortgage deal with no fees and charges? How about a shiny home loan with an introductory rate of only 2.25 per cent? As lenders scramble to withdraw competitive fixes – in some cases withdrawing mortgage offers – as base-rate rises loom, many borrowers may be tempted by such eye-catching offers.
But experts have warned borrowers to be wary – such deals come with a sting in the tail. Once the low rate ends, homeowners are locked in to the deal as the interest rate increases. Those who want to extract themselves will have to pay huge penalty fees.
Abbey is the latest lender to introduce one of these mousetrap mortgages with extended tie-ins. The second-biggest mortgage lender in the UK stopped offering extended tie-ins in 1998 but reversed its decision last month, when it launched a home loan with an 18-month tie-in period.
The bank offers many variations on the deal. Under one option, Abbey waives arrangement fees and covers all legal and valuation costs if borrowers lock in to a three-and-a-half-year loan. While the rate is fixed at a perfectly respectable 5.34 per cent for the first two years, borrowers will be forced to pay the lender’s standard variable rate (SVR) for a further 18 months.
SVRs are usually several basis points higher than the Bank of England base rate. Abbey’s SVR is 7.34 per cent, so once the fix ends, a borrower with a £150,000 loan would have to pay an extra £186 a month. But those who try to escape the deal will have to fork out an early repayment charge equal to 45 days’ interest at the SVR – about £1,357.
Sue Hayes, of Abbey, says: “Ten years ago people didn’t like extended tie-ins as they were perceived to be the only products on offer and were often hidden in the small print. Today an extended tie-in is part of a much broader choice of product options and is completely transparent.”
The lender argues that with an average £175,000 loan, borrowers will save £2,000 in fees, including legal fees, with its mortgage.
But Nick Gardner, of Chase De Vere Mortgage Management, the independent broker, says that while Abbey’s deal may look attractive to those desperate to keep upfront costs to a minimum, borrowers will eventually pay much more than they save on upfront fees.
Mr Gardner says that borrowers would be better off with Abbey’s two-year fix at 5.34 per cent, with a free valuation, £250 towards legal costs and a £999 fee.
“If people can’t afford a hefty arrangement fee, they can add it to the sum of their mortgage, so they don’t have to go for an extended tie-in or a higher rate,” he says.
Borrowers keen to avoid being tied in on the higher rate do have an alternative option. Abbey offers a two-year fixed-rate deal with no upfront fees and no extended tie-in period – at the higher than average rate of 6.37 per cent.
The lender also offers a five-year fix at 5.89 per cent or a two-year tracker with a current rate of 5.39 per cent, both with 18-month tie-ins on the SVR. To avoid the extended tie-in, borrowers will have to pay higher rates. The rate on the five-year deal is 6.32 per cent, nearly half a point more than Yorkshire Building Society’s fee-free five-year fix at 5.89 per cent.
However, Abbey is by no means alone in offering mouse-trap mortgages. Portman Building Society offers extended tie-in deals, as do West Brom-wich and Market Harborogh building societies.
Two months ago Newcastle Building Society launched a rate of 2.25 per cent until March 2009. The catch is that borrowers are locked in for four more years on the SVR, currently 7.34 per cent. Those who try to exit the deal between March 2009 and 2010 will have to pay a charge equal to 7 per cent of the mortgage – £10,050 on a £150,000 loan.
Melanie Bien, of Savills Private Finance, the mortgage broker, says that borrowers who choose a best-buy ten-year fix will pay less over six years than those choosing Newcastle’s deal.
But Steven Marks, of the Newcastle, says that there is a place in the market for extended tie-ins, as long as lenders are transparent about their charges and rates. “We do have customers for which they are of tremendous benefit,” he says. “For example, first-time buyers who find that the low rate helps them on to the property ladder until they can afford to pay more.”
Dominic Scriven was tempted by a low rate with an extended tie-in, but when he saw that he would have to pay the lender’s SVR at the end of the loan, he kept looking for another deal.
The self-employed bricklayer, who is married with three children, recently sought a new mortgage for his home in Manchester and chose a Woolwich lifetime tracker at 0.18 points above the base rate, giving a current rate of 5.43 per cent.
The £69,000 loan, organised by London & Country, the mortgage broker, has no early repayment charge, so he can switch to a rival lender at any time without penalty. “I thought that was a good deal and it would not cost anything to remortgage if I needed to,” he says.
Mr Scriven, says that one of the main reasons why he rejected mortgages with extended tie-ins was the prospect of an early repayment charge if he decided to switch to another mortgage.
“All of the low-rate deals I looked at would have locked me in for at least a couple of years,” Mr Scriven says. “I want to be able to switch at a moment’s notice.
“The children have recently started sitting exams, so we won’t move for a couple of years. But once they are off to university, we may think about looking for a new house and would like to be free to choose another mortgage deal if it suits us better.”
Source: timesonline.co.uk
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Elizabeth Colman says that borrowers must do their sums before taking the bait of a low interest rate or a fee-free deal
Fancy a glittering mortgage deal with no fees and charges? How about a shiny home loan with an introductory rate of only 2.25 per cent? As lenders scramble to withdraw competitive fixes – in some cases withdrawing mortgage offers – as base-rate rises loom, many borrowers may be tempted by such eye-catching offers.
But experts have warned borrowers to be wary – such deals come with a sting in the tail. Once the low rate ends, homeowners are locked in to the deal as the interest rate increases. Those who want to extract themselves will have to pay huge penalty fees.
Abbey is the latest lender to introduce one of these mousetrap mortgages with extended tie-ins. The second-biggest mortgage lender in the UK stopped offering extended tie-ins in 1998 but reversed its decision last month, when it launched a home loan with an 18-month tie-in period.
The bank offers many variations on the deal. Under one option, Abbey waives arrangement fees and covers all legal and valuation costs if borrowers lock in to a three-and-a-half-year loan. While the rate is fixed at a perfectly respectable 5.34 per cent for the first two years, borrowers will be forced to pay the lender’s standard variable rate (SVR) for a further 18 months.
SVRs are usually several basis points higher than the Bank of England base rate. Abbey’s SVR is 7.34 per cent, so once the fix ends, a borrower with a £150,000 loan would have to pay an extra £186 a month. But those who try to escape the deal will have to fork out an early repayment charge equal to 45 days’ interest at the SVR – about £1,357.
Sue Hayes, of Abbey, says: “Ten years ago people didn’t like extended tie-ins as they were perceived to be the only products on offer and were often hidden in the small print. Today an extended tie-in is part of a much broader choice of product options and is completely transparent.”
The lender argues that with an average £175,000 loan, borrowers will save £2,000 in fees, including legal fees, with its mortgage.
But Nick Gardner, of Chase De Vere Mortgage Management, the independent broker, says that while Abbey’s deal may look attractive to those desperate to keep upfront costs to a minimum, borrowers will eventually pay much more than they save on upfront fees.
Mr Gardner says that borrowers would be better off with Abbey’s two-year fix at 5.34 per cent, with a free valuation, £250 towards legal costs and a £999 fee.
“If people can’t afford a hefty arrangement fee, they can add it to the sum of their mortgage, so they don’t have to go for an extended tie-in or a higher rate,” he says.
Borrowers keen to avoid being tied in on the higher rate do have an alternative option. Abbey offers a two-year fixed-rate deal with no upfront fees and no extended tie-in period – at the higher than average rate of 6.37 per cent.
The lender also offers a five-year fix at 5.89 per cent or a two-year tracker with a current rate of 5.39 per cent, both with 18-month tie-ins on the SVR. To avoid the extended tie-in, borrowers will have to pay higher rates. The rate on the five-year deal is 6.32 per cent, nearly half a point more than Yorkshire Building Society’s fee-free five-year fix at 5.89 per cent.
However, Abbey is by no means alone in offering mouse-trap mortgages. Portman Building Society offers extended tie-in deals, as do West Brom-wich and Market Harborogh building societies.
Two months ago Newcastle Building Society launched a rate of 2.25 per cent until March 2009. The catch is that borrowers are locked in for four more years on the SVR, currently 7.34 per cent. Those who try to exit the deal between March 2009 and 2010 will have to pay a charge equal to 7 per cent of the mortgage – £10,050 on a £150,000 loan.
Melanie Bien, of Savills Private Finance, the mortgage broker, says that borrowers who choose a best-buy ten-year fix will pay less over six years than those choosing Newcastle’s deal.
But Steven Marks, of the Newcastle, says that there is a place in the market for extended tie-ins, as long as lenders are transparent about their charges and rates. “We do have customers for which they are of tremendous benefit,” he says. “For example, first-time buyers who find that the low rate helps them on to the property ladder until they can afford to pay more.”
Dominic Scriven was tempted by a low rate with an extended tie-in, but when he saw that he would have to pay the lender’s SVR at the end of the loan, he kept looking for another deal.
The self-employed bricklayer, who is married with three children, recently sought a new mortgage for his home in Manchester and chose a Woolwich lifetime tracker at 0.18 points above the base rate, giving a current rate of 5.43 per cent.
The £69,000 loan, organised by London & Country, the mortgage broker, has no early repayment charge, so he can switch to a rival lender at any time without penalty. “I thought that was a good deal and it would not cost anything to remortgage if I needed to,” he says.
Mr Scriven, says that one of the main reasons why he rejected mortgages with extended tie-ins was the prospect of an early repayment charge if he decided to switch to another mortgage.
“All of the low-rate deals I looked at would have locked me in for at least a couple of years,” Mr Scriven says. “I want to be able to switch at a moment’s notice.
“The children have recently started sitting exams, so we won’t move for a couple of years. But once they are off to university, we may think about looking for a new house and would like to be free to choose another mortgage deal if it suits us better.”
Source: timesonline.co.uk
Please post any news stories about IVAs here:
http://www.iva.co.uk/forum/default.asp?CAT_ID=5
See my Blog:
http://ivanews.blogs.iva.co.uk