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Further Information

The Motley Fool Mortgage Service:
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Mortgage comparison on the Financial Services Association (FSA) site:
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Choosing the right mortgage

 

Picking the right mortgage from the thousands available on the market can be very confusing. Even though you know that it is a decision that could cost you a lot of money if you get it wrong, you really need stamina to pick out the one that's best for you. More often than not, the borrower will simply plum for the one at the top of the best-buy table or, more likely, pay a broker hundreds of pounds to do it for them. The truth is that there is no such thing as the best mortgage, but rather the one that fits your financial needs and circumstances the best.

 

Most Competitive

If you want one of the most competitive types of mortgage, consider getting a discount or tracker. A discount mortgage will normally give you an interest rate around 2% less than the lenders Standard Variable Rate (SVR), where as a tracker will track slightly above the Bank of England base rate. The base rate has already been cut by 0.5% this year so a tracker could be looking particularly attractive right now. For buyers with a good credit rating and a 10% deposit, the Motley Fool Mortgage Service recommends the following:

 

Term

Rate

Mortgage Lender

Fee

Length of deal

 

Top Short-Term Fixed Rate

 

5.08%

 

£995

 

2 years

 

Top Long-Term Fixed Rate

 

5.24%

 

£999

 

Until end of Jan 2013 (portable)

 

Beware that with a discount mortgage, although the rate will look very attractive on those best-buy tables, the lender controls their SVR and therefore how much interest you pay. If they decide to whack it up one day, which of course they can do at any time, your discount rate ceases to look attractive.

 

Tight Budget

Obviously, before you do a deal you will always check the size of your monthly payments. If there is a genuine concern in your household that you would struggle to meet the repayments if the interest rate was to increase, then you should consider going for a fixed rate deal. Fixed rate deals can last for 2 years to 25 years, but the longer the fixed rate, the higher the interest rate. Think seriously about how long you want the fixed rate for; if you remortgage before the fixed period is up, there are normally heavy penalties. Also check that any long-term deal is "portable": i.e. you can move home and keep the same mortgage. Below are a couple of recommended fixed-rate deals from the Motley Fool Mortgage Service.

 

Tracker/Discount

Rate

Mortgage Lender

Fee

Length of deal

 

Top Tracker

 

0.01% below Base Rate (so currently 5.24%)

 

£999

 

2 years

 

Top Discount

 

2% discount off lender's Standard Variable Rate (so currently 5.34%*)

 

£799

 

2 years

 

 

*Hanley & Economic Building Society have not yet cut their SVR following this month's Base Rate Cut, so this rate should drop by a further 0.25% very soon.

 

 

Deposit

If you only have a small deposit or even no deposit at all, watch out for a Higher Lending Charge (HLC) or a Mortgage Indemnity Guarantee (MIG). This is the lenders way of making you pay more interest for the greater risk that they are taking. These charges make the mortgages so uncompetitive that you are better off waiting in order to save up a deposit of at least 5%, rather than actually entering into one of them. For example, Bradford and Bingley will lend you 100% of the property price, but they will charge you 6.89% in interest and want a £999 set-up fee.

f you're one of the lucky souls that can put down a healthy 20% deposit then you won't have much problem snapping up a healthy deal. First Direct, for example, will give you a two year fixed rate at 4.75%. There is a downside though; a higher than usual product fee of £1,498.

 

Flexibility

Some mortgages allow you to overpay when you are able to, therefore clearing the mortgage earlier without any penalties. Others let you offset your savings to do the same thing. You will pay more interest for this flexibility though; most of these deals are around 6%.

 

Brokers

Although you could save hundreds of pounds by setting up the mortgage yourself, brokers often have access to products and services that you don’t. So before you take out the loan, you will need to weigh up which one works out cheaper in the long run, giving particular attention to the set up costs and the potential penalties of remortgaging. Always remember; just because a product is top of the best-buy table does not necessarily mean it is the best loan for you.




 

Feedback recieved for this article:

Submitted by Comments:

Name: Sara
Article:
Choosing The Right Mortgage

Thank you so much, very informative, just about to buy my first property and am terrified, your site is beautiful, very simple yet informative, love the articles, who writes them?
Wish me luck!
Sara
Added: February 22, 2008