Newspaper article The Journal (Newcastle, England)

Take Care with the Time/cost Sums

Newspaper article The Journal (Newcastle, England)

Take Care with the Time/cost Sums

Article excerpt

Byline: By Andrew Frankish

Andrew Frankish examines the pros and cons of mortgage tie-in conditions.

IT MAY seem surprising to hear, but approximately 40pc of mortgage products are subject to some form of extended tie-in.

In other words, out of the 1,500 or so mortgages available to an average buyer looking to borrow pounds 100,000, about 600 of these will require the borrower to repay some form of penalty if they choose to redeem before the tie-in period elapses.

Lenders frequently offer temptingly low interest rates - fixed and discounted - to attract customers and, naturally, require something in return. This is usually the customer's loyalty, for a period of time, often after the incentive has finished.

Of course, the key issue to consider is whether the borrower will be better off taking advantage of the incentive once this period has expired, accepting the higher interest rate the lender chooses to impose.

It is worthwhile considering how these products actually work.

Often, a lender will offer a rate as low as 2pc per annum, over a period of two or more years. This scheme will, however, require the borrower to pay back an additional amount, based on several months' mortgage payments or a percentage of the outstanding loan, sometimes for up to five or six years, should they redeem the loan during that time.

This applies regardless of the reason for making an early repayment - paying off the mortgage early, moving home or to another lender.

The disadvantage of these schemes is that, once the incentive period is over, the borrower is effectively tied into the lender's standard variable rate, or another uncompetitive product, until the extended overhang period expires.

This is understandable from the lender's perspective, as they need to guarantee some form of recompense for headline rates that are often lower than they can buy funds for.

One of the best ways to determine whether a discounted or fixed rate mortgage with extended overhangs is the right deal is to examine your reasons for considering such a scheme. …

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