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Because SVRs are usually uncompetitive, mortgage lenders often attract new customers by offering discounted mortgages. These will offer a discount to the SVR for an introductory period – usually between 2 and 5 years – before you revert again to the SVR.


These discounted mortgages can be very useful for people struggling with the high costs of homeowning in the first few years after buying. They don’t have the certainty of fixed rates, but are usually lower.


You can also get combinations such as discounted tracker mortgages, which can be very competitive.


What are offset mortgages?

Offset mortgages are fairly new, and still not that widely available, but can be very attractive. They basically allow you to roll your savings account, current account and mortgage account into one, making it far more cost effective and tax efficient.


What drives them is the fact that normally the best return you can get for your savings is to pay off your mortgage, for two reasons: interest rates on savings are almost always lower than the rates you have to pay for mortgages, and you probably have to pay tax on interest earned from savings. As an example, if you have £10,000 in savings, and a £100,000 mortgage, you would actually be a lot better off on a monthly basis with a £90,000 mortgage and no savings (but obviously wouldn’t have the funds for a rainy day). Also, if you get monthly wages your current account may have unusually high funds at certain times, earning no interest – although this money could be used to pay down the interest of the mortgage.


An offset mortgage rolls all three into one, making sure you make your money works hard for you all the time, and giving you the flexibility to pay off more of the mortgage when you have more money, but then to reduce your payments when you need a bit more to spend.


Should I go for daily calculation or annual calculation?

Mortgage lenders generally calculate the amount of interest you are due to pay daily, monthly or annually. Without hesitation you should go for daily calculation, and avoid any mortgage with annual calculation.


It seems like a nerdy point, but mortgage lenders have relied on confused borrows to have interest calculation methods that are blatantly unfair and add many thousands of pounds to a cost of a mortgage. It has only been as a result of media outrage that they changed their methods, but some still haven’t.


With annual interest calculation, the lender calculates how much interest you should pay each month only once a year – often at New Year – and then carry on charging that throughout the year, even though you are most likely paying down the mortgage each month, and possibly making one-off capital repayments. For example, if they calculate your interest payment on 1st January, and you pay off £5000 on 2nd January, they will charge interest on that £5000 you have repaid for a whole year until they calculate the interest again the following January 1st.


If you get a mortgage with annual interest calculation, the lender will still be charging you interest on debts that you have repaid. This is legal but morally questionable, and will mean you end up paying many thousands of pounds more over the term of the mortgage. Avoid.


What are the advantages of First Time Buyer mortgages?

Many mortgage companies have special deals for first time buyers, which are generally aimed at helping people get on the property ladder – they usually accommodate having lower deposits (ie the ratio of the mortgage to the value of the property can be higher) and have lower application fees.


They are often discounted as well, to make the early years cheaper (but you may pay it back later). In general, these first time buyer mortgages can be very helpful at a difficult time – but do still check out the rest of the market in case there are some particularly good deals.


Should I go for a bank or building society?

After the demutualisation wave of the 1990s, the building society movement in the UK is a shadow of its former self. The building societies – which are owned by their customers – often claim that they give better value for money because they don’t have to pay dividends out to shareholders every three months. This may be true, but it certainly isn’t guaranteed, and the proof has to be in the pudding. If you get a better deal from a building society than a bank, then go for it. If you don’t, don’t.

by Cormac Henderson

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