Don't Burn Cash On Your Mortgage

One Fool recalls profiting from thinking 'outside the box'.

In December 1983, my wife and I needed a mortgage for what was to be our third house purchase. The process was instructive -- but ultimately saw friends and family voice real concern that we were about to come a cropper by doing something that appeared so obviously risky.For our first mortgage, we'd gone to the Halifax. In those days, you were supposed to save for a deposit for some years, and we'd religiously put money into a Halifax savings account for that very purpose. Come the day, we took the afternoon off work, put on our best suits, and went for an interview with the Halifax, in order that they could see for themselves the sensible, sober twenty-somethings to whom they were lending £14,000. (Yes, a whole £14,000 -- really!)For our second mortgage, the process was largely repeated, minus the interview. For our third mortgage, with our careers taking off, and a move to a house in Devon on the cards, we wanted to roughly double the amount we were borrowing. A further interview was therefore required. I was determined, though, to look around to see if a better deal could be obtained. Conditioned by years of what was in effect 'mortgage rationing', friends and family thought this unlikely.This was a market that had been dominated by building societies (not banks), with lenders offering practically identical interest rates to borrowers who were supposed to be grateful to be offered a mortgage at all. Indeed, lenders had until recently only lent freely up to 80% or so of the valuation of the property -- the balance being deemed risky, and requiring the borrower to take out mandatory insurance at his/her expense to protect the lender from a fall in house values!A stroke of luck brought a phone call from an ex-colleague. He'd become what we now would call an IFA, and phoned me at work with a proposition. Could he come round to our house, and bid for our business?At 7pm one evening, David duly arrived, and launched into his pitch. A large American bank -- the Chemical Bank of New York (these days part of Chase Manhattan) -- was establishing a foothold in the British mortgage market. It had joined forces with the Scottish Amicable insurance company and could offer attractive rates for borrowers taking out endowment mortgages -- 'endowment' hadn't yet become a dirty word.The deal was good. Very good. I wasn't looking at the predicted eventual policy values, but at cash outgoings. Comparing the Halifax deal with the Chemical Bank deal, we would save almost £50 per month, thanks to a lower rate of interest and a lower endowment premium for the endowment top-up we required. £50 per month isn't to be sneezed even today, and in those days the amount was even more significant. Interest rates, don't forget, were much higher: our highly-competitive mortgage offer was at 12% (yes, not a typo: a whopping 12%), and within two years rates would rise still further to 14%. Nevertheless, friends and family were concerned. "The Chemical Bank of where?," was a common reaction. "It will end in tears...," was an equally common prediction.Needless to say, it didn't. We stayed with Chemical through another house move (by which time its mortgage operation had been sold to Banque Nationale de Paris, these days BNP Paribas), enduring still more gloomy prognostications, but all the time paying a lot less than we would have done elsewhere. But the occasion of still another house move in 1990 did prompt a change -- to HSBC, as they offered a better interest rate, and better still, the ability to over-pay the mortgage and make sporadic extra payments that immediately reduced the interest paid. Even the endowment policy turned out alright, in the end.The lesson from all this? Inertia buying rarely pays. Always look around. These days, there's a heady collection of mortgage types and offers around -- offset mortgages, tracker mortgages, 'interest only' mortgages, fixed-rate mortgages, capped mortgages, current account mortgages and more. Not all are suitable for everyone -- but all of them (even 'interest only' mortgages) are suitable for some Fool, somewhere, in some particular set of circumstances.Back in the 1980s, we didn't have the wealth of information that is readily available on-line today. Advice was often poor, often biased, and seldom disinterested. For high-quality information on mortgages, visit the Fool's Mortgage Comparison Centre -- and discover what you might save.More: Malevolent Mortgages Under Attack | Six Million Face Higher Mortgage Rates