Beware these six mortgage cost traps

Here are my most-hated mortgage traps every homeowner - and wannabe homeowner - should know about, and avoid.

Mortgages are hugely expensive at the best of times. So, the last thing you need is to be stung with unforeseen costs. But the trouble is, some lenders are pretty wily when it comes to slapping bills on unsuspecting borrowers.

So, let's stop them getting away with it. Get to know my six most-hated mortgage traps, and you will never fall victim to your lender's tricks:

1. Avoid steep arrangement fees

Many (but not all) lenders charge an arrangement fee to cover the cost of setting up your mortgage. Some charge a flat fee which can easily run to £1,000 or more.

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In particular, watch out for low interest loans with high arrangement fees. They might look cheap on the surface, but the fee could easily wipe out any savings you might have made by paying a low rate.

Beware of deals that charge a fee as a percentage of the loan. Alliance & Leicester, for example, offer some loans with a 3% product fee. So, if you were borrowing say, £150,000 it would set you back a staggering £4,500.

If you have the option, it's generally a good idea to stump up for the fee in advance, to avoid paying interest on it during your mortgage term. Read Why you should pay your mortgage fees upfront to find out more.

But it pays to be careful of lenders that insist on charging you in advance, as some will sneakily keep the cash if they reject you for the mortgage later on.

And finally, some mortgages are fee-free, which could help to keep your costs down. Just check the total cost of the deal to make sure you're getting good value.

2. Don't pay a higher lending charge

This applies if you're borrowing a high proportion of the property value - or what's known as a high loan-to-value (or LTV). If you want to borrow say, 90% LTV - in other words you have a 10% deposit or equity stake in your home - some lenders may ask you to pay a higher lending charge (HLC) to compensate them for the added risk they are taking by lending to you.

HLCs can be very expensive and, in my opinion, totally unnecessary since higher LTV loans normally charge more interest anyway. My advice would be if you're going to be charged, choose an alternative deal if at all possible.

3. Beware of mortgage payment holidays

A temporary break from your mortgage repayments might seem like the ideal solution if your finances are becoming overstretched. But the true cost of a mortgage payment holiday can run to a lot more than you might think.

Your capital repayments will be put on hold, but the interest you skip is added to the mortgage, increasing the amount of capital you owe your lender. Each month a payment is missed, the interest charged is higher because your outstanding loan escalates during the break.

Payments holidays are expensive, and shouldn't be treated as an easy or cost-effective way to rein in your expenditure.

4. Beware of the standard variable rate (SVR)

You'll normally revert to the SVR once your special rate deal has come to an end.

Some lenders' SVRs are pretty cheap following a round of base rate cuts. But when the base rate begins to climb again, they could rise rapidly. So, be warned: If you're on the standard rate at that time, you may need to act quickly to avoid an unwelcome hike in your repayments.

5. Avoid extended early repayment charges (ERCs)

Many mortgage deals come with ERCs if you pay off your mortgage or move to another lender, early. For instance, if you have a five-year fixed rate deal, they will almost certainly be payable for this period.

6. Avoid Mortgage Payment Protection Insurance (MPPI)

Of course, this article wouldn't be complete without a mention of dreaded MPPI!

John Fitzsimons looks at an ace deal for borrowers with only a 15% deposit.

This is an insurance policy which covers your monthly mortgage repayments if you're no longer able to work due to accident, sickness, or unemployment.

Sounds great in theory, but there are several pitfalls. First, for the protection you get, MPPI can be very expensive - particularly if you buy a policy from your lender rather than an independent provider.

Second, these policies are riddled with exclusions, and are notoriously difficult to make a successful claim under.

And third, cover normally only lasts for a year regardless of whether you're well enough to return to work, or you have found a new job following redundancy.

Read Don't be conned into buying this for more advice on how to protect yourself.

Watch this video: Sort out your mortgage online!

This is a lovemoney.com classic article, originally published in June 2009, and updated

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