Beware the Pitfalls When Looking For Cheap Mortgages

Mortgages can be expensive and exhausting financial commitments. It is understandable if you find a great deal to want to take it straight away, but when is what looks like a cheap mortgage really a good offer? There are often hidden charges and restrictive terms and conditions hiding behind a low interest rate, so look out for the following before you sign on the dotted line.

Watch out for cheap mortgage traps

When taking out a mortgage, you put down a deposit on the amount you are borrowing. The loan-to-value (LTV) percentage is key here. The LTV is basically the amount of money you borrow against the property value, expressed as a percentage of the property value. So, a high LTV mortgage means that mortgage lenders need more insurance against the borrower defaulting on payments. This insurance takes the form of Higher Lending Charges (HLCs), which is the first thing to look out for when searching for a cheap mortgage. The higher the LTV, the more likely you are to be subjected HLCs and the more the HLC will be. HLCs are calculated as a percentage of the portion of the loan above 75% of the property value, which can add up to thousands. It is important to consider whether or not you will have to pay HLCs when comparing mortgage products.

The next potential hidden charge that could blight your cheap mortgage deal is the Early Repayment Charge (ERC). ERCs are imposed by a mortgage lender if you decide to repay your mortgage early, to cover the interest they will lose, or if you decide to switch to another mortgage product or another lender. ERCs are calculated as a percentage of your original loan, a percentage of the outstanding balance, a percentage of the sum repaid, or a set number of months' interest, so it is important to know which method is used to work out how much you would have to pay. If you think that you will want to repay your mortgage early, or switch mortgages, you should work out if the ERCs would prevent you from saving any money.

The final payment you can fall prey to is Mortgage Payment Protection Insurance (MPPI). It is always advisable to take out MPPI, as with a policy like this your mortgage payments are covered for a specified period of time if you become ill, injured or unemployed. A common mistake many people make, however, is to rely too heavily on their MPPI, or not know the circumstances under which their MPPI does not apply. For example, most MPPI policies do not cover payments of more that £1,500 per month and many do not allow you to claim cover before 60 days have passed since you took out the policy. Periods of unemployment that could have been predicted, such as those due to pre-existing medical conditions, are also not often catered for. So, when searching for a cheap mortgage, it makes sense to search for cheap but effective MPPI as well, and always read the small print.