The Which? campaign for an end to unfair mortgage practices has succeeded in virtually stamping out some of the worst, such as extended early repayment charges and conditional insurance. But big lenders are still operating expensive traps that can catch consumers out.
Take the Mortgage Indemnity Guarantee (Mig). Anyone borrowing a high percentage of their property's value may be charged a Mig; thirteen of the 20 biggest banks and building societies charge one if your mortgage is for more than 90 per cent of the value of the house you are buying.1
The lenders use the money from the Mig to buy an insurance policy which protects them if the home needs to be re-possessed and the borrower owes more than they can get by selling it. So, although the borrower pays for the Mig, it protects the lender, not the borrower. And Migs don't come cheap, adding hundreds of pounds to the cost of buying a home. The most expensive Which? found, from Royal Bank of Scotland, would cost £1,790 for someone taking out a 95 per cent mortgage on a house worth £100,000.
Lenders who still charge interest annually rather than daily or monthly are also costing their customers. Seven of the top 20 lenders still do this on at least some of their mortgages, and Bradford & Bingley does it on all its products. Charging interest annually means the borrowers pay interest on money they no longer owe until the lender recalculates the debt at the end of the year. On a 25-year, £100,000 mortgage charging 5.8 per cent interest, a borrower would pay almost £90 a year more with a lender using the annual rather than the daily system.
There's another sting in the tail for borrowers who finally come to pay off their mortgage if their lender is one of the six big lenders that charges interest until the end of the month.3 This means that, even if borrowers repay their mortgage on, say, 3 May, they'll be charged interest until 31 May, thus paying interest on money they no longer owe.
Other traps to look out for include fees lenders charge when you pay off your mortgage, insurance which you have to take out as a condition of your mortgage, interest rates which don't change in line with the base rate and extended early redemption penalties.
Meanwhile people wanting to find out the true cost of a mortgage, or how much they can save by switching to a better deal, can use the Which? Mortgage Search (www.switchwithwhich.co.uk), which has a constantly updated database of more than 8,000 mortgages.
Malcolm Coles, editor of Which?, said:
"There's no excuse for the mortgage lenders still to be trapping people in these underhand ways. When we contacted those who charge interest until the end of the month, none of them offered much justification - according to Bradford & Bingley, 'it's just the way it works'. This just isn't good enough. "Meanwhile, Which? will carry on campaigning to get the industry to clean up its act."
