It pays to pick a home-grown home loan
THE OBSERVER - 10TH OCTOBER 2002
The banks have done well out of their diversification into mortgages in the 1980s and now dominate the market, with over 70 per cent of mortgage business. Interest rate margins are healthy – perhaps too healthy in the view of the Treasury, which has recently launched an investigation into mortgage lending.
The Treasury team may also like to cast an eye over the profits banks make from mortgage-related products, such as the investments to back interest-only mortgages, plus life, buildings, contents and mortgage payment protection insurance.
Double your money
It’s a different story when you add in all the extras lenders are keen to sell as part of the complete mortgage package. Even the squeaky-clean Nationwide – along with most of the others – charges nearly twice as much for a life insurance policy as Equitable Life. Lloyds TSB charges nearly three times the price.
The same is true of mortgage payment protection insurance. The most expensive policy is from Lloyds TSB (which sells C&G mortgage and related products); the cheapest is from Nationwide. But again this is nearly twice the monthly cost of £10.33 charged by independent Burgesses for its standalone Equality policy.
Convenience or con?
Lenders will insist you take out buildings insurance and will probably encourage you to buy contents cover as well. Some promise discounts if you buy the two together. Abbey National and the Halifax came close to the combined cost of £21.88 a month for a buildings policy though broker John Charcol and a contents policy from Norwich Union Direct. For the same cover HSBC, Lloyds TSB and NatWest charge more than £40 a month.
It all adds up
If you bought each product individually, the monthly cost would be just over £400 – about the same as the mortgage repayment on its own from all but HSBC, First Direct and Nationwide. The difference between the yearly shop-around cost and the yearly cost of the most expensive mortgage package, from Lloyds TSB, is nearly £1,300. that’s equivalent to around £32,000, more than half the mortgage loan over its 25 year life. Even the two lowest-cost packages, First Direct and Nationwide, would cost around £17,000 more over the full mortgage term.
Of interest only
The cost mount further with an interest-only mortgage package. Of the banks that still offer endowment policies to back interest-only mortgages, Barclays and Lloyds TSB are the dearest, costing some £250 a year more than an equivalent policy from Equitable Life. Substituting a Scottish Widows policy for the one sold by Lloyds TSB brings the price down to the level of those from Nationwide and NatWest – still £120 a year more than the shop-around cost.
The banks’ equity-based individual savings account (ISA) offering fare little better. And once the cost of buying life insurance (which is included in the endowment) is added on to the ISA, the whole mortgage package costs about the same as an endowment package. This is also true of the shop-around cost with an ISA and life insurance from Legal & General.
