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Mortgage enticements

Deals

With so many people wanting to lend you money, there are a lot of different types of enticements that banks use to lure you in to borrowing money off them. These deals typically last for 2-5 years, after which you either go back to the lender's standard rate, re-negotiate another discount or change lender.

Typically, the sort of benefits they offer are:

Some lenders are now offering fixed rates for the entire term of the mortgage. This might appeal to you if you want the security of knowing exactly what the payments will be and don't want the hassle of re-negotiating your rate every couple of years.

Downsides

You don't get something for nothing, there's no such thing as a free lunch and don't eat yellow snow. I could go on with the cliches, but you get the idea. Although these deals are, on the whole, A Good Thing, watch out for these things that could bite you in the bum.

There will be a pre-defined period which your discounted/fixed/capped mortgage covers. After that, it will revert to the bank's standard rate for mortgages and you'll suddenly find yourself paying extra dosh that you hadn't budgeted for. The discounted period can be anything from 1 year to the whole term of the mortgage, but is typically 2 or 3 years. Watch out for the impending end of your deal period and start looking into new deals before it runs out. Don't be afraid to get quotes from other banks, ring up your current one and tell them how much cheaper you will be able to get your mortgage elsewhere. Be prepared to switch mortgage lenders. They all want your custom and will do things to make it easier for you, like sorting out all the paperwork for you or not charging for the survey. There will be a charge for closing your account, but if your new deal is good enough it will be worth it.

Look at the lock-in period. Say you take out a mortgage that has a fixed rate for 3 years. After the first year the interest rates drop and you find out that you could now get a deal for a fixed rate mortgage at a lower rate. What is there stopping you changing to it? Go on, take a guess. Oh yes, it's the lock-in period. During this period, changing your mortgage will incur a penalty (i.e. a charge of a sum of money) from the bank. As a real-life example, our current mortgage uses the formula -

  (the number of 1000's of pounds left to pay off)
Multiplied by
  (the number of years we've been on the discounted rate)
Multiplied by
  1.33 

To change our mortgage after 14 months on our discounted rate, we would be charged almost 2000 quid. Other mortgages will differ in how the penalty is worked out, so read the small print to find out what your penalty would be. After the lock-in period, you'll just get the normal charges for closing your account with them.

Also, watch out for mortgages where the lock-in period is longer than the discounted period. Your payments will go up to the bank's standard rate and you will not be able to get another discounted mortgage without incurring a penalty. Sorry to shout, but deals like this are out there, so make sure you know what you are getting into.

It's also worth noting that these discounts make the APR pretty useless when comparing mortgages. The APR applies to the whole term of the loan, which will mostly be at the bank's standard rate. However, you are only really interested in the first few years, when the discount is in effect. As soon as the lock-in period is over, you can get another discounted one. Keep doing this and the standard rate (which the APR will mostly reflect) doesn't matter.

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