The price of waiting for your money

Attractive mortgage rates may end up costing homebuyers more than they imagine, says Stephen Pritchard

Problems often arise when a small lender launches a very attractive interest rate, but does not have the administrative capacity to handle the demand.

In other cases, the lender might only have a relatively small tranche of money available at the headline rate, forcing it to turn away applicants. More cynically, some mortgage companies will offer a limited amount of money at a very attractive rate, in order to move up the best-buy tables.

"Small lenders have a limited ability to raise money either in the wholesale markets or from their savers," cautions Ian Giles, the head of marketing at the brokers Purely Mortgages. "They might offer a tranche of just £5m, which two or three of the large brokers can sell in a day."

Lenders, he warns, often rely on homebuyers' inertia to keep business coming in, once their top rates have sold out. Someone who has already started the remortgage process might accept a less attractive rate in order to keep on track. Giles advises against this.

Nor is it just smaller lenders who can experience problems. Giles points to the experience of the Clydesdale Bank - part of the huge National Australia banking group - which offered a highly attractive fixed-rate deal earlier this year. Offer times doubled to three to four weeks and completion times reached six to eight weeks. The bank eventually withdrew it.

Homeowners looking to remortgage, especially at the end of a fixed or discount mortgage, can be hit particularly hard by processing delays. "If you end up paying your lender's standard variable rate [SVR] it does make quite a difference," he says. "The difference between a rate of 4.75 per cent, as offered by the Clydesdale, and 4.99 per cent elsewhere, is quickly eroded by having to stay on SVR for another month."

Perhaps surprisingly, neither the Council of Mortgage Lenders (CML), the industry trade body, nor the Financial Services Authority sets standards for turning around a mortgage application. The CML maintains that this would be impractical as individual mortgage applications vary widely. "Because there is no standard mortgage application, there is no standard time for its turnaround," explains a spokesman.

The last time the CML surveyed its members on completion times, in 2002, it found that three quarters of companies issued offers within 15 working days, with a third able to do so in two weeks. The organisation says that it has no reason to believe this has changed.

Mortgage brokers, though, counter that, although average turnaround times might be acceptable, homebuyers and remortgage applicants still need to be aware that some lenders can take significantly longer to process loans.

Good brokers will have few qualms about advising clients to switch their application to another bank, if service standards slip. "You do have to look at the deal and the service package," says David Hollingworth, a director at the brokers London and Country. "We monitor standards closely, as you can get a deterioration in service if the lender becomes swamped."

For a short-term mortgage deal where time is of the essence, paying a slightly higher rate in return for greater certainty can be worthwhile. This is especially the case if the more expensive mortgage is generally available, rather than a very limited tranche of money, as it reduces the chance of having to switch mortgage lenders part way through the process. Arrangement fees will also play a part. But borrowers can also help themselves to avoid mortgage application problems by keeping on top of the process.

Homeowners looking to remortgage can avoid spending time on a lender's expensive standard variable rate by acting well ahead of time.