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Introduction
10 Tips for a Happier Home Loan
The UK is often referred to as a nation of homeowners. Thats hardly surprising, given that nearly seven in ten of us own a home, which is a far higher proportion of owner-occupiers than in many European countries. Of course, the money to buy our nests has to come from somewhere, which is why around 1 million households have a mortgage. At the end of 005, British mortgage borrowers owed a total of 965 billion, which comes to an average of over 8,000 per home. Most of us take out a 5-year mortgage, which we repay by way of three hundred monthly repayments. With interest-only mortgages, you only pay interest during these 5 years, followed by one lump sum to pay off your debt. With repayment mortgages, you repay the debt as you go. If youre going to make the most of your mortgage, you need to minimise the amount of interest that you pay (and the same goes for other mortgage-related expenses, too). This guide shows you how to do just that - and points out a few pitfalls to watch out for.
Contents
10 Tips for a Happier Home Loan
No. 1 No. 2 No. 3 No. 4 No. 5 No. 6 No. 7 No. 8 No. 9 Dont over-stretch yourself . . . . . . . . . . . . . . . . . . . . . . . . 4 Loyalty costs you plenty. . . . . . . . . . . . . . . . . . . . . . . . . . 6 Get the best mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Interest-only or repayment? . . . . . . . . . . . . . . . . . . . . . . . 9 The joys of over-paying . . . . . . . . . . . . . . . . . . . . . . . . . 10 Watch out for overpriced insurance . . . . . . . . . . . . . . . . . 1 Beware of ultra-low rates . . . . . . . . . . . . . . . . . . . . . . . . 14 Sleep easier with a fixed or capped rate. . . . . . . . . . . . . . . 15 The horror of hidden fees . . . . . . . . . . . . . . . . . . . . . . . . 16
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Here are three ways to reassure yourself that youre not going to be over-stretched:
The first is to put down a large deposit. If you have a 10% deposit, youre less likely to fall into negative equity (where your home is worth less than your mortgage) than someone who has a 100% mortgage.
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Interest-only or repayment?
10 Tips for a Happier Home Loan
In the Eighties and Nineties, the vast majority of mortgages were interest-only loans. This means that borrowers only paid interest on the money they owed, without chipping away at their debt. In order to pay off the debt after 5 years, they would invest money to produce a lump sum. Most people in this situation were sold an endowment, which combines life insurance with an investment plan. However, in recent years, a combination of high charges and depressed investment returns has all but destroyed the credibility that endowments once had. Nowadays, most people choose to have a repayment mortgage, where part of each monthly repayment goes towards paying off their loan. With a repayment mortgage, you are guaranteed to pay off your home loan, assuming that you make all your repayments on time. If youre worried about future investment returns, or have an endowment that wont clear your mortgage, you could convert all or part of your mortgage into a repayment loan. Some lenders will charge you a fee of around 150 to do this, but this may be worth paying if you want to play it safe.
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Life insurance.
If you bought this from your mortgage lender, your premiums are probably three times as high as they could be. Getting cheaper cover will save you thousands over the life of your mortgage. Also, you dont need this cover if youre young, free and single, but its essential if you have a partner and/or dependent children.
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Income protection
(long-term sickness cover) and critical illness insurance (protection against cancer, heart attack, stroke and other serious conditions). As above. Continued . . .
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Investments.
Youd be mad to buy any investment plans from your mortgage lender. Most have super-high charges and inferior investment returns. For long-term investing over the long term, we recommend an index tracker wrapped up in a tax-free ISA, which is a simple, low-cost way to grow your money in the stock market. Find lower premiums in our Insurance Centre.
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Solicitors fees
(for legal work, known as conveyancing)
Arrangement fees
(also known as application or booking fees), which can be 500 or more
Completion fees
(paid when you draw down your home loan)
(see tip seven). Another gruesome charge to watch out for is a mortgage indemnity premium (MIP), also known as a mortgage indemnity guarantee (MIG) or higher lending charge (HLC).
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Visit The Motley Fool Mortgage Centre at: www.fool.co.uk/mortgages 16
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