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The House Hop Guide to Mortgages

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Pitfalls to Avoid

There are lots of ways in which you can be caught out when deciding on a mortgage. Here are some of the important things to look out for.

Early Repayment Charge

Also known as a redemption penalty, this effectively locks you into a mortgage for a set number of years. If you repay the mortgage before the end of this period you will have to pay an early redemption charge, which could be as much as several months' interest.

Some mortgages with low introductory rates will have a penalty period that lasts longer. For example, a mortgage with a three year introductory rate might have a penalty period of five years. This extra two years is known as the "overhang".

It is possible to get a mortgage without an overhang or, even, without an early repayment charge, however, the rates for these tend to be higher and there may still be administrative and legal fees associated with repaying early.

Higher Interest Rates

The higher the loan to value ratio of your mortgage the more expensive it will be. If you are considering how much deposit to put down you should work out how this will affect your repayments over the lifetime of the mortgage before deciding. The difference can be many thousands.

Consider All The Fees

As mentioned above, never decide on a mortgage based only on the interest rate, the arrangement fee or the incentives being offered.

It's very important to look at the effect of all three and work out what the overall costs will be over the lifetime of the mortgage.

For example, if you can afford to pay a higher arrangement fee upfront this may save you money every month for the lifetime of the mortgage, covering the extra upfront costs after a few years and saving you money long-term.

Introductory Periods

Remember that introductory periods don't last forever — once they finish the rate reverts back to the bank's Standard Variable Rate. This may mean a significant jump in your repayments so make sure that you will be able to cope with this before taking the mortgage out.

Extended Mortgage Term

One way in which the cost of monthly payments can be kept down is to extend the term of the mortgage — eg, to 30 or 35 years from the standard 25.

Be aware, however, that extending the term of a mortgage dramatically increases the amount of interest you have to pay back. See the examples in the following table for a mortgage of £150,000 at 5% interest:

mortgage term in years	monthly repayments £	total interest paid £	% increase in total interest paid
25	877	113,067	-
30	805	139,883	23.7
35	757	167,953	48.5

If the only mortgage you can afford is one for an extended term then you should consider re-mortgaging to a shorter mortgage as soon as you can afford to.

Shop Around

As mentioned above, you will be expected to take out life assurance, buildings insurance and contents insurance.

Don't just accept the policies that your lender offers. Shopping around could save you hundreds of pounds every year.