Personal Finance: The Hidden Dangers of Being Locked In

Article excerpt

House-buyers have been warned to beware of the hidden dangers of discount mortgages.

The Research Department's analysts admit that the initial rates seem attractive, but warn that there will often be a lock-in period, during which borrowers will be heavily penalised if they try to move their loans elsewhere.

During that time, the customer will have to make payments at the lender's standard variable rate, which may be appreciably higher than the industry's average.

Marketing director Mr Mark Hayes-Newington says there are a "significant" number of providers requiring lock-in periods in excess of three years, with some stipulating five years.

"Discounted mortgages are complex lending vehicles. The best plans operate like a see-saw at rest, with provider and customer thinking they have got a good deal.

"Where the see-saw is not level, one party is benefiting at the expense of the other."

Mr Hayes-Newington says the crucial problem is not the length of lock-in periods, but the very involved calculations that a potential borrowers needs to go through to identify if a particular plan is good value, and suitable for their purposes.

"This involves evaluating the discount rate and period, whether compulsory insurances or fees are required, what incentives are available, what the lock-in period is and the early redemption schedule of charges," he said.

"On top of that, they will also have to form a view of the company's variable rate policy after the discount term has expired."

One of the present aims among personal finance watchdogs and consumer groups is to encourage "transparency" among providers, which means that the fullest possible details of products must be provided to potential customers. …