Careful choice of lender could save thousands

WHEN you have just found the perfect home, deciding where to apply for your mortgage may seem a dull diversion. But choosing a lender with a good track record for interest rates and reasonable charges can save you thousands of pounds.

A survey of lenders by What Mortgage magazine last year, which calculates how much a borrower would have to pay on a variable-rate pounds 50,000 interest- only mortgage, shows that there is more than pounds 1,500 difference between the cheapest and most expensive mortgages over just two years. First Direct, Midland Bank's telephone-based banking subsidiary, tops the table with a loan costing pounds 7,595 over the previous two years, while HFC Bank languishes at the bottom, having cost its borrowers pounds 9,105.

In the past, mortgages from banks have proved to be more expensive compared with those from building societies.

Patrick Bunton, a director of mortgage brokers London & Country, says this is principally because banks were more interested in commercial lending. "Banks would do residential mortgages when asked, but they didn't chase the business," he says.

Nowadays, however, some banks are very keen to attract home buyers, and this is reflected in the cost of their mortgages. Whereas the Bank of Scotland is ranked 55th out of 63 lenders for 10-year-old loans by What Mortgage, its interest rates have become cheaper recently, moving the Bank up to 15th position for its loan charges over two years. Likewise, the Royal Bank of Scotland is ranked 38th for 10-year loans and eighth for two-year loans.

Mr Bunton says that 90 per cent of his clients' applications are placed with building societies and just 10 per cent with banks, but this is purely a reflection of the number of societies compared with banks in the market.

However, London & Country does not recommend mortgages from centralised lenders. These are companies without a branch network to raise deposits. Instead, they raise money for lending through the money markets.

Centralised lenders first appeared in the mortgage market in the mid- 1980s with the launch of National Home Loans, The Mortgage Corporation, Mortgage Express and Household Mortgage Corporation. While building societies were constricted by the type of mortgages they could offer, centralised lenders attracted a huge number of borrowers with new and exciting mortgages, including fixed- and deferred-rate mortgages and 100 per cent loans.

Then the recession hit. People could neither meet their monthly mortgage payments nor sell their properties to escape the situation intact. Borrowers began to default on mortgages, often simply handing over the house keys to their lenders.

Building societies could sustain the losses involved, but the centralised lenders had no reserves to fall back on. To claw back some of their losses, most began to charge higher interest rates than the societies.

Many have now left the market, selling their mortgage portfolios to other lenders. BNP Mortgages, for example, has recently been bought by the Halifax Building Society, while UCB Bank's portfolio has been taken over by the Nationwide.

Others closed to new business, but have continued to run the existing mortgages - at a cost. Mortgage Express, a subsidiary of the TSB, is currently charging its borrowers a variable interest rate of 8.99 per cent, compared with the average 7.49 per cent charged by most societies.

Some centralised lenders are still in operation. National Home Loans closed its original portfolio but has opened up a new subsidiary, Home Loans Direct, for new borrowers.

However, while borrowers with Home Loans Direct are charged a variable interest rate of 7.45 per cent, old National Home Loans borrowers are paying up to 11 per cent. National Home Loans says that the higher rate reflects the riskier nature of the loans it has made.

Ian Darby, director of mortgage brokers John Charcol, says: "We haven't done any business with NHL for years, simply because we disapprove of its dual pricing policy."

John Charcol does, however, frequently recommend that customers take out loans with another centralised lender, Bank of Ireland Mortgages. Mr Darby says this lender has remained consistent in its treatment of borrowers and the development of competitive loans.

Mr Bunton prefers to avoid centralised lenders altogether. "We feel that where a lender has a branch network, it is more answerable to its customers. If you start messing around with the rates, your customers will soon let you know of their disapproval by coming in," he says. "A centralised lender is too far removed from its customers."

Here are some tips on how to choose a good lender:

q Check how your prospective lender's rates compare with those of other lenders. Consult your mortgage broker and look at the What Mortgage survey, published in the March issue.

q Do not dismiss your local building society. Small societies frequently offer the best rates.

q Even if a lender is offering an exceptional fixed or discounted rate, it is worthwhile checking out their track record for variable rates. The penalties for early redemption on a fixed- or discounted-rate mortgage may mean that you are tied to that particular lender for some time after your loan has reverted to variable-rate terms.

q If you think you are paying over the odds now, consult an independent financial adviser who specialises in mortgages.