How Not To Get A Mortgage

It's easy to get stuck with an expensive mortgage and overpriced insurance. Find out how a little legwork can save you lots of money.

This is a true story, about how a friend's nephew was almost driven to penury in his quest for a mortgage (I'll just call them "nephew" and "uncle" to protect their privacy). Nephew's mistake, common to many, was to seek the services of one of those mortgage salesmen who masquerade as financial advisors (you know, the kind who work on commission and who make more money the more expensive a deal they sell you).

The total monthly outlay quoted by the salesman was £800 a month for a mortgage on a small flat, which is a lot of money for a young man. But Uncle came to the rescue, and by doing some online searches he quickly found a mortgage deal at £620 a month. "So that'll be £800 a month either way" said nephew. "What?" enquired Uncle. "Well, add the £180 monthly insurance, and it's £800". Dumbstruck, Uncle went back to his keyboard and found alternative insurance at £28 a month, to cover life and critical illness. Include nephew's partner, then add buildings and contents insurance, and the princely total was £70 a month -- a saving of a whopping £110 a month over what the commission-hungry salesman was trying to sell him.

"Now, can we get the mortgage deal any better?" thought Uncle. The £620 a month deal was for a 100% mortgage, so Uncle did a search for 95% mortgages (we'll come to how to get the deposit shortly). And suddenly, the number of mortgage possibilities jumped from 20 to 400, and the best deal (avoiding the ones with ferocious penalty clauses should you want out in the early years) came in at £510 a month, getting the savings up to £220 a month. That's a fixed-term deal, but he can switch when it expires and get another one (and no doubt Uncle will get another phone call).

The only problem now, though, was the 5% deposit, so where did Uncle get that from? Well, he examined nephew's mum's mortgage. Mum has had a mortgage with the same bank for nearly 20 years, and only had £24,000 outstanding on it, so Uncle went back to his online searching (using the Motley Fool mortgage centre, in case you were wondering) and found a deal for her that, for the same monthly outlay as her current mortgage, would allow her to borrow an extra £8,000. Nephew only needed £6,000 for his deposit so that's all she went for. So she has borrowed more money, for a lower monthly outlay, and the difference is now going into a savings account which she can use to pay of some mortgage capital in a few years if she wants to.

So Nephew and Mum are now sorted and happy. But what's really scary was the actual start of the conversation -- it started when Nephew called Uncle and asked "Do you know how to cash in a pension?", because that's what he wanted to do to find the money to cover the original £800 a month. How many young people are there out there falling prey to these salesmen and cashing in their retirement investments to help pay for their overpriced products and fund their fat commissions? There must be many, and it both scares and appals me.

Don't get taken for a ride! Use the Fool to compare mortgages and compare insurance quotes.