Some help with getting a UK Mortgage...

• What are 100% mortgages?

• What are Buytolet Mortgages?

• What are base rate tracker mortgages?

• What are Capped Rate Mortgages?

• What are cashback mortgages?

• What are Current account mortgages?

• What are discount mortgages?

• What are Endowment Mortgages?

• What are First time buyers mortgages?

• What are fixed rate mortgages?

• What are flexible Mortgages?

• What are home improvement mortgages?

• What are ISA mortgages?

• What are Non-Standard mortgages?

• What are offset mortgages?

• What are pension mortgages?

• What are Remortgages?

• What are self build mortgages?

• What are Self Certification Mortgages?

• What are Stepped rate mortgages?

What are 100% mortgages?

Before you buy your first home, you may not have saved up enough money for a deposit. Remember that most mortgage lenders will only lend up to 90% of the cost of the home. You could wait until you have access to 10% of the cost of the property that you want, or you could try and get on the housing ladder now, before property prices go completely out of your reach. This is where a 100% mortgage will come in useful.

100% mortgages are offered by many lenders, who are happy to allow people to borrow the full value of their property. This is especially popular with first-time buyers. However, even though 100% mortgages have advantages, there are also some serious downsides.

Many people worry about negative equity, which is when the value of your home is less than the value of the remainder of your mortgage. Should you take out a 100% mortgage, you are immediately at risk of going into negative equity. If house prices were to fall even a little bit, then you would be plunged into negative equity, which would be a disaster should you need to sell your home quickly or if you find it difficult to make your repayments. At the moment, house prices may be rising, but this is mainly due to certain property hot-spots skewing the figures, whilst other locations could be slipping.

There was a property crash at the end of the 80s, after which lenders became very wary of offering 100% loans, as deposits were needed to give customers a buffer against going into negative equity. As the nineties progressed, lenders started to offer 100% mortgages again, and some will even offer up to 125% of the property's price, to enable you to cover your costs and maybe furnish your home.

You may have to pay an above-average interest rate for the 100% loan, which covers the lenders for the risk that they are taking. You may also have to pay a high rate of interest due to the lack of competition in the market, with only a few lenders offering 100% mortgages.

You will probably be charged a MIG, which is a mortgage indemnity guarantee. This adds a sum to your loan of several thousands of pounds, which covers the lender, not you, should you not be able to make repayments and the lender has to sell the home for less than they are owed.

100% mortgages are good for people who can't afford to buy a house without already owning one. If you have just graduated, and are saddled with debts, a 100% mortgage which buys a property as well as consolidating your debts is a great option.

Make sure you can afford the payments, even if interest rates doubled.

What are Buytolet Mortgages?

Average property prices went up by about 15% in 2001. Meanwhile, the stock market fell by more than 15% in the same period. Now, whilst both these figures are not sustainable, and are likely to be less volatile in 2002, how can you ignore an investment which is so attractive compared to the stock market. The fact is that whilst no-one really knows what will happen with the stock market over the next few years, it is almost certain that property values will increase, thus making it a good and safe long term investment, whilst occasionally being a nice short term one as well.

Because of this, at the end of 2000 there were over 110,000 outstanding buytolet mortgages covering over £8 billion of mortgage debt. At the end of 1999, there had been only 64,000 loans worth just over £4.5 billion. Property investment became the place that people ran to when the dot.com bubble burst and they were looking for a safer place to put their money. Others had bought into property with the pensions mis-selling scandal in the late 1980s which put many people off using pension funds to provide for retirement altogether.

Buytolet is a good opportunity for good capital growth to the fact that should you find good tenants you will have your monthly repayments on your mortgage covered by their rental yield.
Should you be considering buying a property to let out, it is more than likely that you will already be a homeowner. If this is so, you will probably have a mortgage, and at the very least not be a mortgage novice. However, that doesn't mean the step into the world of buy-to-let is simply an extension to your current mortgage. Buytolet mortgages are different, and are suitable for certain people and in certain situations. This type of investment can help you make the most of your money, but you can also lose some too, should you not do your research before your investment and make bad decisions after.

You should make sure that you find a good location that is close to local facilities like restaurants and shops as well as public transport links. You can find a wealth of potential tenants knocking at your door should you buy the cheaper properties in university towns or big cities. However, should you buy close to a university, you will have to budget for no income in the summer months when demand will drop during the holidays.

You can get all different kinds of buytolet mortgages, the difference being the way the amount you can borrow is calculated. This will depend on the size of the rental income expected. You should also expect to pay a larger deposit than with a residential property.

What are the dangers of buy-to-let mortgages?
These days, investing in properties with the aim of renting them out is open to all kinds of people from various walks of life. Gone are the days when owning multiple properties was the preserve of the wealthy.

However, buy-to-let is not as simple as buying a property and then sitting back to wait for the money to come in. There are significant dangers in buy-to-let, and if you don't do your homework, you could find yourself losing money instead of earning money.

Firstly; location, location, location. It's not just a mantra you know. You can't earn any money from buy-to-let unless you can rent it out and if it is in the middle of nowhere with hardly any access to local amenities then you could find trouble letting it. You should buy somewhere close to a large city and within walking distance of local amenities and public transport.

Even if you are in a good area, you need to find out about the demand for rental properties and the demographics of the area your looking in. Buying a one bedroom flat where prospective tenants are predominantly young families will not bring home the bacon. The Association of Residential letting Agents (ARLA) will offer you help and advice on rent levels and regulations.

You should also understand that there are quite significant initial costs after investing in your property. You have to find a deposit likely to be around 20% of the cost of the home. You'll need to pay for valuation, solicitors' fees, surveys, and stamp duty.

Not only that but there are numerous home buying expenses that you need to think about. You may have to decorate the home, buy furniture and appliances. Then you have to get tenants into the flat, that isn't free.

One of the most potent dangers of buy-to-let is that the landlord doesn't think about what they can really afford to invest. To lend on a property, many lenders will want your rental income to be 125% of the monthly mortgage payment or more, so do your sums.

Then there is the hassle of managing the property. Do you want to be woken at 4am to fix a burst water pipe? If not, an estate agent will take care of this, find you tenants, collect rent for you and arrange the tenancy agreements and the inventory for you. They will charge you 15% of your income, but it could be worth it.

You should keep some spare money aside as you could find yourself between tenants, not receiving rental income, lose your job or have the tenants from hell that burn your front door down. You are responsible for all of this, and your lender will still require your monthly payments whatever happens.

What are base rate tracker mortgages?

If you have been on a variable rate mortgage for a while, you may have experienced the fact that lenders do not always pass on every cut in the Bank of England base rate. In particular, they don't do this with the almost missionary zeal with which they pass on base rate rises! Lenders justify this behaviour by pointing out that they have responsibilities to both borrowers and savers. This is true, but it is very likely that they are lending more money than they have saved in their accounts, so its the lenders who benefit most from this policy. If you want to make sure that your mortgage absolutely follows the behaviour of the base rate, then you can take out one of the newer types of products on the market, the tracker mortgage, which will always follow the base rate. At least, though, you can follow the news, which will tell you what the Monetary Policy Committee might do. With a variable rate mortgage, you will suddenly find out the rate is going up when they put it up.

A further advantage of the tracker mortgage is that the difference between the variable rate and the base rate is usually a lot smaller than the margin between the ordinary variable rate mortgage and the base rate. With a variable rate mortgage, the margin is around 1.5%, but with a tracker the payable rate could be below the base rate or slightly above it. Those people who took out a tracker mortgage when the base rate was 6% about 2 years ago have thus enjoyed a constant lowering of their payments as the base rate stands at 4%.

There are a few variations in the type of tracker mortgages available. For instance, there is the lifetime tracker, which will track the base rate for the entire life of the mortgage. Then there is the tracker running for a set period at an agreed margin above or below the base rate and then moves to the lender's standard variable rate. Then there are trackers in which the lender makes a commitment that the difference between the base rate and the mortgage pay rate will not exceed a certain level.

Although tracker mortgages seem foolproof, you still need to be on your guard and make sure you read the small print on the mortgage, where an opt out clause could be hidden. For instance, some lenders will guarantee that the pay rate will not rise over 1% above the base rate, yet the small print states that in exceptional circumstances the company can waive the guarantee.

You should watch out for redemption penalties and understand that trackers make budget planning difficult.

What are Capped Rate Mortgages?

A capped rate mortgage puts a maximum limit on the payable rate you have to pay. However, should the lender's standard variable rate be below the level at which the cap is set, you get to pay that amount. This is a product that puts together one of the most attractive aspects of a fixed rate mortgage, that you know where your mortgage is going to rise to at worst and are guaranteed it not going any higher. It mixes it with a variable rate mortgage, where if base rates go down, your mortgage pay rate will follow it down. Capped rate mortgages usually last for a few years. This is on average around five years, but it is possible to find capped rate mortgage lasting for the entire life of the loan. Furthermore, the added sophistication of the mortgage market means that you can get some capped rate mortgages with introductory discount periods.

A further development of the capped rate mortgage is the 'Cap and Collar' mortgage, which some wags have suggested sounds like a fetish, but is in fact when you have a cap limiting the maximum pay rate, and a collar, limiting the minimum pay rate. This product means that you are hedging your bets in both directions, and will mean that your cap is set lower than with a normal capped mortgage in return for you accepting the collar. As long as the cap and collar period exists, your mortgage rate will remain within a set margin.

The advantages of the capped mortgage is that when interest rates are likely to rise, they offer protection for borrowers against repayments going over a certain level. Thus, they are seen as being almost as attractive as fixed rate mortgages, although fixed rate mortgages are set a good deal lower than capped rate mortgage will be. It makes it easier to budget for your expenses when you know what is the highest amount your payments could be. Remember that in addition to this, you can enjoy the benefits of any cuts made to the lender's SVR.

The disadvantage of the capped rate mortgages is that the rate payable on them is still usually higher than that available on comparable fixed or discounted rate products. This is even with the existence of discounts in conjunction with the caps. So, capped rate mortgages are a conservative choice, as you won't get the best rate on the market.

Should the rate go higher than your cap level, you would have been better off with a fixed rate mortgage, and if the rate falls, a discount mortgage would have been better value.

Look out for redemption penalties, during both the capped period, and also overhanging after the cap rate is finished.

What are cashback mortgages?

Here's a truism. If something looks like it's too good to be true, then it probably is. Have you ever received a phone call saying you've won a free holiday? Or received junk mail telling you you've won a new car? Whilst this seems like great news, usually there'll be strings attached. You may need to go somewhere you get your prize and spend the day being subjected to the hard sell from some timeshare cowboys. Or you may have to join a club, which will end up costing you money.

Some mortgage deals are like this. The lenders recognize that there are costs that you are liable for when you are buying your first home, so they'll try and structure the loan so that your initial repayments are less than the standard variable rate. Or they'll offer money up front to help you out with your costs. This may be helpful at first, but may cost you a large amount in the long run, so the wrong mortgage can be a very expensive mistake. Do your homework first.

The cash back mortgage offers you an amount from, say, £200 up to £1000 as a flat amount, or it may be a percentage of the loan. An example would be when Northern Rock offered a variable rate loan at 6.99% with 7% of the loan offered as cash back to you. With a loan of £100,000, this is a not insubstantial sum of £7000, which will come in very useful when buying your new home. However, the deal is actually quite expensive, with the high standard variable rate, and the loan is only available for up to 90% of the value of the home.

With that Northern Rock loan, you also face redemption penalties for six years, which means you are paying for your cashback for 6 years. To change the deal away from the punitive standard variable rate you'll have to pay back a percentage of the mortgage. This includes the whole amount of the cashback in the first year (7%) to 2% in the sixth year, which is £2000 on the above example.

Nowadays, redemption fees are not as readily accepted as before. Big cashback deals will be locked into redemption fees of at least five years, and you should be aware of that. These redemption deals should be understandable, after all without them everyone would get a cashback mortgage then change their mortgage immediately afterwards, which would not make any sense for the lenders.

Should the cashback mortgages tie you in for six years at the variable rate, then you'll probably find that in the long run that a mortgage on a lower rate without cashback for six years will be a better deal.

What are Current account mortgages?

A personal organizer, an all-in-one conditioner/shampoo bottle and the Swiss army penknife all have something in common. They all attest to the popularity of combining more than one function in one piece of equipment. Almost every industry has this, and the mortgage industry has its own combination product, the current account mortgage.

The current account mortgage (CAM) combines your mortgage, your current account, your savings account and even your personal loans and credit cards into one account. Your salary is paid into this account, something insisted upon by some lenders, and should you not spend all your income at the end of the month, that amount is taken off what you owe on your mortgage.

So, should you be paid £2000 after tax each month, then spend £1500 in the month, you have £500 in your account which comes off your mortgage. Since interest is calculated on a daily basis, the interest you pay is immediately reduced.

The CAM allows you to make overpayments and underpayments and borrow back money, so can be defined as fully flexible. You may get a debit card and a chequebook to help you withdraw money easily, up to a set limit, which is essentially the maximum loan-to-value of your property. Used properly, the CAM allows you to save money as with interest charged daily, every pound paid into the account makes a large difference to the total cost of the loan. Thus, you can pay off your loan early, which many people see as a massive advantage.

However, the CAM is not for everyone. It's a giant overdraft, making your mortgage a debt no different to other debts. Because all your other accounts are rolled into your mortgage, you are going to be in debt for a long time. Think about it this way, when you open your first bank account statement and see that you are £150,000 the worse, are you likely to faint? If you are, then the CAM may not be perfect for you.

Perhaps you may want to consider an offset mortgage, where your mortgage, current account and savings account are kept as separate products yet interact with each other. What you have in credit offsets your debt, so should you have a mortgage of £100,000 and have £20,000 in your savings account you will only be charged interest on £80,000.

CAM providers have tinkered with their products to try to blur the line between the CAM and the offset mortgage, so for instance Virgin One have redesigned their CAM so you can view the individual elements of your account separately in addition to your bigger mortgage picture. But still, the concept is the same, combine your finances to make them more efficient and save money.

What are discount mortgages?

A discounted rate mortgage guarantees that you will pay a set amount below a lender's standard variable rate for a specified period of time. Whilst the standard variable rate goes up and down, the discount will remain fixed.
You can get a discount mortgage lasting from as small a period as six month up to about five years. In general, the shorter the period of the discount, the higher the discounted rate will be. So, for example, if you have a two year discount, you may get a discount of 1% of the standard variable rate, but a one year discount could be 2%.

Discounted mortgages are recommended for people who prioritise keeping their initial payments as low as possible. Perhaps because it is their first mortgage and their income isn't so high and they want to have some spare cash to spend, perhaps on furnishing their home or on car repayments. The discount period can help you achieve this.

Discount mortgages are excellent for people who are happy to play the system. You should find out whether there will be redemption penalties for changing mortgage after your discounted period has ended. If there isn't, it may benefit you to wait until the end of the discount period then move to another discounted mortgage, hopefully with no overhanging redemption penalties. After that one, you could move again. In fact, assuming the mortgage market stays the same, you may be able to benefit from discounted mortgage for your whole mortgage term.
You should note that if you don't remortgage, and you do nothing after the pre-determined discount period, you will go back to the standard variable rate

Discount mortgage are very popular, in fact, 60% of new mortgage or remortgages taken out in 2000 were discount mortgages, and almost every provider offers a discount deal. It's perhaps not surprising, when you consider that there are millions of people paying over 7% for their mortgages, it's not surprising that when offered a pay rate of under 4% people will take a discounted mortgage.

So why do lenders offer these discounts, when the payable rate is lower sometimes than the bank of England base rate, or more importantly, lower than the savings rates that they offer? Well, quite simply, it's a marketing ploy. It's no different to any other sales promotion offered by any retailer. They are allowing you to buy the same product but at a discounted price, so that you become their customer. Once you are their customer, they can make it difficult for you to leave, with redemption penalties, and they also have your complete attention and can work on marketing to keep you as their customer.

What are Endowment Mortgages?

There are two main ways of paying back a mortgage, one is a straight repayment mortgage, where your monthly repayments go partly towards paying off the capital that you have borrowed as well as the interest on that amount. The second type is the interest-only mortgage, where your monthly repayments go towards paying of the interest, and at the end of the mortgage term you will need to pay off the capital amount.

For interest-only mortgages, you should open an investment vehicle, into which you pay a monthly sum that aims to build up an amount that will pay off the mortgage capital at the end of the term, and hopefully provide a healthy lump sum for your own purposes.

For this purpose, in the 1980s and 1990s many mortgage borrowers used endowment policies to back up their mortgages. These invested in what was a booming stock market, which generated excellent returns and included life insurance, which was one less worry on the borrowers' back. Many people then sat back, waiting for these policies to generate the cash to pay off the capital as well as leaving them with a fat wodge of cash to spend.
Of course, it hasn't quite happened that way. Whilst no one has actually ended up with a shortfall on their policy, the falling stock market returns mean that many policies (over 5 million) are unlikely to generate enough to pay off the capital. These shortfalls need to be made up somehow.

The Financial Services Authority made endowment providers send out letters to this effect, telling people what kind of growth would be needed in the stock market for their policies to pay off the mortgage. Green meant that if growth was 4% you'd still pay off the mortgage. Amber meant that you needed at least 6% growth, and the red letter meant that even at the high rate of 8%, your endowment won't pay off your mortgage at the end of the term. These letters need to be sent out every two years.

Should you not be on track to pay off your endowment, you should make some arrangements to make up the shortfall. It's not a good idea to throw good money after bad and pay more into your endowment policy, so you could open up an ISA, or another savings account, perhaps with less risk and pay money into that.

As to what you should do with your endowment. Do not surrender it to the provider. You could be penalised and you will only receive the surrender value. Rather, you should sell the policy on the traded endowments market, which can result in anything up to 33% above the surrender value. Don't panic though, but don't do nothing either.

What are First time buyer's mortgages?

The biggest financial commitment you'll undertake is your first home. Yet most people jump into getting a first-time buyer mortgage without having a clue about them. Mortgages are competitive as there are over 7000 deals from which to choose. The flip-side of so many mortgage deals is that it is very confusing for first-time buyers.

First, and most confusing is the amount of words, terms and jargon thrown around. How do you wade through "capped rates", "stepped discounts", "Aussie mortgages", "offset mortgages" and the long list of deals without getting stuck. If you go to an advisor to guide you through the market, will they just sell you the mortgage that pays the most or the quickest commission? So many questions.

But don't give up. You have to consider the fact that your rental payments are being thrown down the drain, and how good an investment a property is. You should get your foot on the property ladder as soon as you can, otherwise the first rung becomes higher and higher up quicker than you can keep up with it. So, let's begin with the costs.

The amount of mortgage you can get depends on your income. Usual multiples are 3.25 times the gross salary of single borrowers. A couple can get 3.25 times the first income plus one times the second income. However, you could get 2.5 times the combined income of both of you. Add onto this the amount that you can afford to pay as a deposit and you have the amount you can pay for your first property.

Some lenders will only lend you a certain percentage of your property. This is lessen the chances for them of the property being worth less than what they owe should you default on your payments. The amount of the mortgage expressed as a percentage of the of lender's valuation of the home is the loan to value (LTV). So, if you have no deposit at all, you will need a loan to value of 100%.

Remember, buying the house is only a small part of the costs you are liable for. You have to pay stamp duty, which is 1% of the purchase price for properties between £60,000 and £250,000, then 3% up to £500,000 and 4% over that amount. Plus you have to pay for the survey, the valuation, and the solicitors fees.

You may also have to pay an arrangement fee for the mortgage and a Mortgage indemnity Guarantee - which is insurance for the lender for you defaulting on your payments when your property is worth less than the loan. Add all these costs to the cost of your property and you may need a mortgage of 105% or more, which is still possible.

What are fixed rate mortgages?

Do you like certainty? Do you like to know what your monthly outgoings will be with as much certainty as possible? If your largest regular expense is fixed for a period time, would that be a great advantage to you? If so, perhaps a fixed rate mortgage is for you.

With fixed rate mortgages it sets the interest rate you will pay for a specified period. This will guarantee the amount that you pay for each month for the agreed period of time. Once the fixed time period is at an end, your repayments will be at the lender's standard variable rate.

The obvious advantage of this is that should you need to budget carefully over the first few years of your mortgage, you will be able to with a fixed rate deal. You will know how much you have to pay each month, and should the base rate rise you will not be caught out with sudden increases in payments. Should the interest rate rise above the fixed rate that you are paying, you will actually be saving money in real terms.

Don't forget that the reverse of this is also true. If the interest rates go down whilst your fixed rate deal is in place, then you will lose out. However, you will at least still know how much money will be coming out of your account each month, and there is a value on that.

The specified period for the fixed rate is usually between six months and up to five years. In order to take advantage of the best rates, you should look at the deals from one to three years. Some lenders will offer some very long term fixed rates, such as 10 years or even for the life of the mortgage term.

In order to decide how long you want the rate to last for, you should take advantage of the internet and the print media and read up about the Bank of England interest rates. Try and work out whether you think they are going to go up or down. If you think they are about to go up then a fixed rate is a great idea, if you think they will go down, then this is still OK, as long as you value the comfort of knowing what your repayments will be.

In the past variable rates have been up as high as 18%, and are now at 4%, so you never know what could happen. If you think you know that it will go down, then a base tracker mortgage may be the better product for you.

What are flexibleMortgages?

Used properly and understood fully, a flexible mortgage could save you thousands of pounds over the life of your mortgage.

Generally, people change their mortgage deal once every five or six years. Otherwise, they may change it once they get to the end of a discounted or fixed period. Chances are in that time the mortgage market has changed a great deal. For instance, in May 1991, the base rate was 11.5%, but today they stand at 4.0%.

In addition, the market is a great deal more competitive. Remortgaging has increased massively because borrowers began to realise that they could change their lender if they wanted to. However, the most prominent addition in recent years to the mortgage market is the flexible mortgage.

The flexible mortgage came over from Australia in 1995. Since then, every mainstream lender has included it in the range of deals. At first, the big players ignored flexible mortgages, but having seen their success they jumped on the bandwagon. Now, 22% of gross lending is taken up by flexible mortgages.

The flexible mortgage puts the control back in the borrower's hands. It can be adapted to suit your circumstances and allows your money to work harder for you.

So many companies call their products flexible that it can be difficult to discern which are truly flexible mortgages and which merely have flexible features. To help, these six criteria should be met to call it a truly flexible mortgage.

The most important benefit of a flexible mortgage, and the one that will save you the most money over the course of your loan is the ability to overpay. You should be able to overpay at any time, and any amount, and by lump sum or regularly. This helps to reduce the total interest owing, and you can pay the loan off early.

Interest should be calculated daily. Thus you get the overpayment's benefit immediately rather than waiting for a year should interest be calculated annually.

A truly flexible mortgage allows you to underpay should you need to, usually after you have overpaid enough to cover the difference between your normal payment and your underpayments.

You should be able to take a payment holiday, maybe for a couple of months or over Christmas. Again, you will probably need to have overpaid first to cover this.

A flexible mortgages should not have redemption fees at any time, so you are free to pay off large chunks of your mortgage or move on without penalty.

Finally, you should be able to borrow back money that you have overpaid should you need to.

Flexible mortgage are particularly useful for the self-employed or people with uneven income. You can overpay when you get unexpectedly high income, and underpay when you are struggling.

What are home improvementmortgages?

Easter used to be the weekend of bunnies, eggs, chocolate and religion. Now, the four-day weekend is more commonly associated with DIY. Easter 2001 saw £2.5 billion spent on home improvements. But these improvements don't come cheap, and many people have to borrow money in order to fund the cost of improving their homes.

Loans for small amounts of money (i.e. around £10,000 - 20,000 for example) can cost you extortionate rates until you can clear the balance. So if you don't have the necessary savings already it could cost a great deal to fund the improvements to your home. However, should your home have increased in value over the years, then there could be another, cheaper option available to you. The best method of borrowing money to fund home improvements is to remortgage your home and release the equity in the property.

Equity is the difference between the amount that you still owe on your mortgage and the value of your home. Should your home be worth £200,000 and your mortgage balance is £130,000, then you have equity of £70,000. As the value of your house rises, your equity rises. House prices increased by more than 15% in 2001, so many homeowners have thousands of pounds worth of equity in their home. You can get your hands on this in two ways. Sell you home, or remortgage.

Remortgaging enables you to borrow on the equity in your home and spend it as and when you want to. With many lenders offering fee-free remortgages, you can move your home loan in order to raise money, rather than save it. So whilst many people may use Remortgaging to consolidate their debt, a growing number of borrowers are using the funds they raise to pay for home improvements.

Lenders like to do this, because making the right improvement to the right kind of property can add a great deal of value to your home. For instance, if you convert a loft into a bedroom and add it to a three bedroom house around London you could add up to £50,000 to the value of your home for the cost of about £25,000. This puts the value of the property up, and the lender likes that, because until the mortgage is paid off, the lender owns the house.

But not all home improvements will guarantee a return on the investment, you can over-improve your home. For instance, if you live in an area of small flats or houses and build a swimming pool, you may not get back what you paid to install it.

Remember that the amount of equity you have in your home has lessened, so if property prices fall then you could end up in negative equity. So be careful.

What are ISA mortgages?

When looking for a way to pay off the outstanding capital on an interest-only mortgage, you have quite a few options. These include endowment mortgages, pension mortgages, and also ISAs.

ISAs replaced PEPs as ways of making an income tax-free. ISAs are Individual Savings Accounts and are now frequently used as a way of backing an interest-only mortgage. The government allows you to put up to £7000 away in this ISA and there are two types of ISA - maxi and mini.

The rules are actually a little bit complicated, as you are allowed to get one maxi ISA or up to 3 mini ISAs in one tax year. A maxi ISA is generally a stock market-only account and these are likely to have the capacity to be used as the savings vehicle to back up a mortgage. You can also choose between three different types of ISA, a stocks and shares ISA, a cash ISA and a life insurance ISA.

Every month, with an ISA mortgage you have to meet the cost of interest on the loan, you then take out the ISA to build up a fund which will hopefully pay back your mortgage at the end of the term. Due to the fall in the stock market, ISAs are actually quite cheap at the moment, as you are paying less for the units that you are funding.

Out of all the investment vehicles, ISAs are the most flexible. You can't just stop paying into an endowment and start again, as you will be liable for penalty charges or you may lose money due to the charges at the start of your fund. With a pension mortgage, you can't access any of the fund until you are at least 50 years old. With ISAs, you can stop paying into them with little or no penalty charges.

You need to think about how much you like risk, and if you are happy not having the certainty that your mortgage will be paid off at the end of the term, then maybe an ISA mortgage is for you. If you don't like the risk then you should go for a repayment mortgage.

So, the advantage of the ISA mortgage is that you get good tax breaks on the income from them, which makes them more tax efficient than endowments. Should your investment grow fast you may be able to pay off your mortgage early. The flexibility is also a good thing, as you can stop and start contributions.

The biggest disadvantage is that you may not get enough funds to pay off your mortgage at the end of the term, and you should also bear in mind that ISAs could be abolished at any time.

What are Non-Standard mortgages?

A mainstream mortgage lender would reject 25% of Britons if they applied today. This is due to the standard criteria that lenders apply and many people's inability to meet them. There was a time when you would not be able to do anything about this, but nowadays, if a mainstream lender rejects you, there is help for you.

There are currently about a dozen non-standard mortgage lenders in the UK, more commonly called 'sub-prime' mortgage lenders. These deal with individual cases, and whilst some are standalone companies, others are actually owned by mainstream banks and building societies, but as separate companies as the business they take is more risky. These companies offer viable alternative for non-standard mortgage applicants and cover a range of borrower types.

Should you be self-employed, have a imperfect credit history or simply have out of the ordinary requirements you may fall into the non-standard category. Should you have not had a bank account or have lived at many addresses you may not be wanted as a customer by mainstream lenders. However, even if you consider yourself as no risk at all of defaulting on your payments, all non-standard mortgage borrowers are considered higher risk, which is matched by the higher rates you'd have to pay on your mortgages.

But that doesn't mean you are stuck on these punitive rates for the rest of your mortgage life. One of the reasons why the rates are so high is that non-standard mortgage lenders know that once you have been with them for over 3 years and have kept up your mortgage payments, you will be considered as having cleaned up your credit history. This means that you can go and get a better deal on the mainstream market.

Sometimes, though, non-standard mortgage lenders provide slap a redemption penalty on their products which will penalise you for leaving before a certain period (usually after 3 years, and could be up to 7,10 years or even for the life) of the loan. These products should be avoided like the plague, unless you have absolutely no choice.

Before you go for a non-standard mortgage, you really should try every other option. Should you not be able to get a mortgage from a bank, you should go to the mainstream building societies. Should the big building societies not be able to help you, you should try small regional building societies, who may take your business. After that, turn to an independent mortgage advisor, who will search the market on your behalf to see if you can avoid the non-standard route. Also, don't forget your own bank manager. If you have been with them for a long time, they may be prepared to help you out.

What are offset mortgages?

Offset mortgages are where the interest on your mortgage is reduced by the funds in both your savings accounts and your current accounts. The more you have in your savings account, the less interest you pay on your mortgage, which helps you to repay your mortgage faster and more cheaply in the long term. Your part of the deal is that you don't receive any interest on your savings or your current account.

The main advantage of this is that with base rates low at the moment, savings rates are quite abysmal. So rather than working to give you a small amount of interest, your savings work to cut down your mortgage payments and repay your mortgage faster. In fact, Intelligent Finance claim that there are some customers who have such a high level of savings that they do not pay any interest at all on their mortgage borrowings.

There's more. All your other debts, such as your credit cards or your personal loans are also linked into the nest of products, and this allows you to repay all of your debts at the mortgage rate, which is likely to be a lot lower than your pay rate on those borrowings. A further advantage is that the credit cards and loans remain unsecured borrowings even though they are paid off at the mortgage rate, so if you can't keep up the repayments on those your home is not at risk.

But do not forget that should you be consolidating your debt into your offset mortgage what you are actually doing is turning short-term debts into long-term debts. Consolidated debts should be paid off as quickly as possible otherwise they will cost you more in the long run. You shouldn't be tempted repeatedly to get into more debt.

The UK population is turning to offset mortgages in greater numbers the more time goes on. Since you can see all of your savings and debts in separate accounts even though they work together, people feel safer with them. This is unlike a current account mortgage, where your accounts are mixed together as if you have one massive overdraft.

Essentially, it's like emptying your savings into your mortgage account in order to pay it off, without losing the easy access to the funds. By 2005, it is expected that offset mortgages will have won 25% of the mortgage market.

The people that will find offset mortgages very suited to them are people with volatile incomes, such as the self-employed or people often paid in large bonuses. People with significant amounts of savings will also find offset mortgages useful.

How ever useful it is, you should not forget the interest rates. You pay for the flexibility, so shop around.

What are pension mortgages?

When you need to build up a fund in order to back up an interest-only mortgage and pay off the mortgage capital at the end of the term, one of the riskiest ways is to take out a pension mortgage.

The way it works is this. When you make pension contributions, you get tax relief on your payments. Thus, for every 78p you pay into your pension, the government contributes 22p should you be a basic rate tax payer. Should you be a higher rate taxpayer, you'll get 40p contributed by the government for every 60p you contribute. This is a very tax efficient way to save money, as should you be a higher rate taxpayer and you get the same returns on your pension as with, say an ISA, your fund will be 40% higher in value.

When you come to draw down your pension, you are permitted to take 25% of the entire fund as a tax-free lump sum, with the rest used to buy an annuity, which will pay an annual income until you die. The lump sum that you get will hopefully be used to pay off your outstanding capital on an interest-only mortgage, Maybe you'll get some cash left over after that as well to spend on yourself in your retirement.

Here are the drawbacks of this. You can't touch the money that you have saved in a pension until you are 50. So, despite the fact that you have probably saved a lot of money in order to make sure than 25% of your fund will pay off your mortgage, should there be an emergency need to use some of it you can't get hold of it.

Also, with the uncertainty of the stock market these days, you can never tell what will happen to your fund. Some funds have shrunk over 33% in value over the past few years, and its difficult to have a contingency plan for that, as you'll just have to contribute more each month to your pension.

The other problem is that your pension is supposed to be saved to pay for you in your retirement. This is when you won't get income from work, and the only other income you can get is the annuity, for which rates have also fallen along with stock market returns. That 25% lump sum could go towards a home by the sea, or to pay for care for yourself or your spouse. Do you really want to eat into that fund? In addition, you have to arrange separate life insurance.

If you want to know what the mortgage code thinks about pension mortgages - mortgage lenders are not even allowed to advertise them. Now, isn't that telling?

What are Remortgages?

In the old days, remortgages were was the last resort of the financially desperate, commonly associated with bankruptcy. Nowadays, it simply means that you are switching your mortgage onto a new deal and probably a new mortgage lender.

Today, almost half of all mortgage borrowers are paying the standard variable rate of their lender, which will never be their best deal. Yet, only 12% of customers re-mortgaged from 1996 to 2001, and yet 30% of customers switched home insurance and 53% of people switched car insurance.

The savings you could make re-mortgaging are even greater than what you could save by changing insurers. Yes, you could incur redemption penalties, usually because you've just come off a discounted or fixed rate deal. But, even if you have a redemption penalty to pay, it may add up in your favour anyway.

Let's say you had a £60,000 interest-only mortgage paying the standard variable rate of 6.54% with, let's say, Shepshed Building society to a fixed rate mortgage of 5.19% with Cheshire Building society. Your monthly payment would fall by £67.50. Let's say you had to pay a redemption penalty of £1000 to remortgage. But over two years you would save £1,620, so that would be worth it.

People who don't remortgage are often scared off by the thought of the work they'd have to do and all the form filling. They suffer from apathy, but its misplaced, because re-mortgaging is easier than ever, especially with lenders trying their hardest to poach customers from each other.

So, how does it work? Well, the best way to find out what other deals there are on the market is to go to an independent mortgage broker. Either call them, see them or look on their website. They'll usually have a comparison service where you can tell them what mortgage you have, what is left on your mortgage, and they'll tell you what you can save when changing to a different deal.

Once you have chosen your new mortgage, you can start the application process. You can do this through the broker or by approaching the mortgage company yourself. In some ways, you then have to jump through the same hoops as when taking out your first mortgage. The new lender will need to value your home, your solicitor will have to do some conveyancing work and you will need to prove your income again.

You will need to decide how much to remortgage for. You can remortgage the exact amount left on your mortgage, or you could borrow more, to take advantage of the equity in your home. Most lenders will allow you to borrow up to a certain amount, and this is a cheap way of borrowing money.

What are self build mortgages?

MoneySupermarket provide excellent rates on self build mortgages.

Anyone who has tried to find the right house in the right location will know that it can occasionally be like looking for the Holy Grail. But maybe that's because the house just hasn't been built yet. Should you wait until one developer uses his telepathic powers to build you the house that you want? Or should you just go and get it built yourself?

If you bought a plot of land, bought materials whilst paying wholesale rates, then employed labour directly, you would be buying a house at cost price. You would be paying what a house developer has to pay, but you don't need to add on your marketing and sales costs and a profit margin.

There's even a Self Build Advisory service to help you, and you can ask them whatever you want. They will understand why most self-builders are doing what they are and it's rarely because of money. The main motivation for people to build their own home is so that they can have the home of their dreams.

First, you need to buy a plot of land, hopefully one with planning permission for development already granted. This could be outlined, where the local authority has agreed that building can take place, or detailed permission, where the actual design has been agreed. Building plots are found in the local papers or even with estate agents.

Your next step will be financing the building of the home. Luckily, self-building has become common enough that over 30 banks and building societies offer mortgages to self-builders. These lenders will lend you between 25% and 80% of the land's value in addition to between 65% and 95% of the building costs. Any money for construction is paid in arrears usually, once key stages of the building work are completed.

With this product, the lender advances the money to you in five steps. This is in order to stop cash flow being a problem. As you might have guessed, you need to plan carefully the costs that you may incur in building the house. You won't get the mortgage unless you've done this anyway, but your instalments might not be sufficient if you have underestimated your costs or suddenly need to buy new materials.

If you decide to selfbuild, you should be aware of your limitations. Don't try and do anything that you are not absolutely sure you can do. There is too much money at stake. You should call in a surveyor, a planning consultant and an architect. You should also get a solicitor to draw up contracts between yourself and your builders. Should you not be about everyday to oversee the building work, you'll need to employ a project manager.

What are Self Certification Mortgages?

In order to get a mortgage application accepted, the lender needs to know that you will be able to keep up the mortgage payments, so that they are paid back for the large amount of money they have paid out. The way they know this is to find out what your monthly income is, and compare it to your monthly payments. This is why you will hear terms such as "income multiples" where a mortgage company will lend you up to 3.5 times your annual income.

Should you be an employee of a company, you can present pay slips or a reference from your company to prove your income. But should you be self-employed, you will need to provide other ways of proving what your income is. Should you have been in business for three years, you may be able to provide three years accounts, which is what is needed to get a self-employed mortgage. Should you not be able to provide three years accounts, you will need to declare your income.

This is what self-certification is, you declare your income and the lender shouldn't have to look at your account. However, it's not quite that simple. Your lender will also need you to prove your income by providing an accountant's certificate, which is a signed document saying that your income will service the requested loan. You shouldn't be surprised if you need to show business bank statements over a period defined by the lender so that they can look at your gross income.

Should you already be paying into a mortgage, you can provide your mortgage statements to show how reliable you have been in paying off your mortgage. Should you be a tenant, you can ask your landlord to provide you with a reference to show that you have always paid your rent.

You lender will also carry out a credit score on you, which will look at your credit history as well as scoring you on your job and living history. This still provides an input to the mortgage application process, so as well as providing all the above evidence, you will still need to have a good credit rating as well.

The self-certification mortgage is rarely provided for mortgages worth more than 75% of the value of the property, as the lender wants to limit their risks. Therefore, you will need to have savings put away so you can pay that deposit. Some lenders may lend up to 85% of the property on a self-certification loan, but this is rare.

Should you not be able to get a self-certification loan from a mainstream lender, you will have to go to a sub-prime lender. You'll get a mortgage, but it'll be more expensive.

How can the self-employed get mortgages?

There are 3.3 million self-employed people in the UK. These people may have a problem finding a mortgage from a mainstream lender. Those is standard full-time employment are basically guaranteed to be paid, and can get references from their employer as well as be able to show payslips proving their income. Mainstream lenders like this as it cuts down their risks and they are serving the majority.

Should you be self-employed or perhaps working on a short-term contract, you could be financially sound, and able to keep up payments easily, but that doesn't make it easy for you to prove you'll keep up payments to your lender. They want to know that you'll be able to keep up payments for 25 years, not just over the next year. Should you be on a short-term contract, you are not guaranteed to get another contract, and should you be self-employed you have to chase payments and are working on contracts as well.

A mainstream lender will want to see three years audited accounts from a certified accountant before they consider a mortgage for the self-employed. Even if you have this, your accountant may have helped you avoid tax by understating your profits for the past few years, (legally and according to GAAP principles) and this could come back to haunt you. Should you not have three years accounts, you may be able to get a self-certification mortgage by declaring your income, providing a certificate from your accountant, your last few years mortgage statements etc, and you are still not guaranteed a mortgage.

Recently, however, some specialist lenders have targeted the self-employment mortgage market by providing some innovative solutions that offer a more flexible approach to match the working pattern of someone who is self-employed. This means that they accept that when you are self-employed you may enjoy periods of high income and you may suffer from periods of low income. Ideally, your mortgage should reflect that, enabling you to overpay and underpay when you need, and not be so unaccommodating to you when you apply.

Mainstream lenders actually used to be more accommodating, they offered self-certification loans and non-status loans where your financial status wasn't confirmed by an employer. But they rarely do this now, and their lending criteria has stiffened. You will need to show an upturn income every year and probably business plans for the future. You will also need to provide a large deposit as you are likely to be lent only up to 75% of the value of your home.

You should look out for the specialist lenders who don't penalise you for your lack of status, trust your accountant, and might offer you up to 95% of the value of your home.

What are Stepped rate mortgages?

Stepped rate mortgages were created as a way of lenders providing a mortgage product that might meet their prospective customers' needs. Although there are many different kinds of stepped rate mortgages, they actually all have the same features. The main feature is that there is one particular deal for a period of time, then another deal for a further period, and so on until the borrower will end up on the standard variable rate.

Stepped rate mortgages come in various forms. One of these could be a series of discounts over a number of years, with the discount reducing during the period of the scheme. Or a series of short term fixed rates followed by a period of discount. There are also some stepped schemes that offer cash back in order to help with moving costs.

With the onset of tracker mortgages, they have been combined with stepped rate mortgages to create stepped trackers, where the mortgage tracks the base rate at a certain amount over it, with the difference between the base rate and the pay rate increasing with each step. In general, a stepped rate mortgage features a great deal to start with but with gradually increasing repayments.

So, who would stepped rate mortgages be good for? Ideally it would be for a first time buyer, or for someone who needs to have payments as cheap as possible at first, but does not need this to be the case for the long term.

For someone who has bought a house but is worried about their ability to make the initial repayments in addition to the cost of buying furnishings and all the extra costs associated with buying a house. This is beneficial because a stepped rate mortgage with an initially large discount, followed by a smaller discount and then a smaller one as the borrowers income grows and they don't need the discount so much.

Perhaps someone who needs to budget carefully in their first year, and would like a fixed rate for a while, followed by a discount as they still want their mortgage costs to be quite low. There are stepped mortgages which do this. They can be tailored sometimes to suit your exact needs, so are worth looking at.

Something you should be very careful about is tying yourself into a stepped rate mortgage which will charge you redemption penalties should you try and remortgage away from them as the discounts get smaller and the pay rate gets higher and higher. In general, you pay for the first period of discount by staying with the mortgage during the next periods. There may even be overhanging redemption penalties which stop you moving mortgage once you are on the standard variable rate.

Choosing your mortgage lender

Stage 1 Selecting the ideal loan

Stage 2 Select the method of paying interest

Step 3 Choose your lender

 

Stage 1

Selecting the ideal loan

First, you need to know about the two methods of repaying a mortgage, which are the repayment method and the interest-only method. As a basic rule, the repayment method will guarantee that you will pay off the loan at the end of its term. The interest-only method means that you pay the lender interest during the term, then pay the outstanding capital back at the end of the term. To do this you use an investment vehicle, the proceeds of which should pay off the loan. You may end up with a surplus, or maybe a shortfall.

The repayment mortgage means that each month you make a payment to your lender consisting of both the interest on your loan and a repayment of part of the capital. Thus, your monthly repayments will be higher with an interest-only loan. You are reducing your debt every month, which should give you peace of mind. You will need to arrange life assurance, so that should you die before the end of the term your mortgage will be paid off.

An interest-only mortgage is more complicated. You need to make monthly payments of interest to your lender, on premiums for life insurance, and into an investment vehicle that should result in your outstanding capital being paid off at the end of the term. Now, when you add all these payments up, you will find that interest only payments are slightly cheaper than a repayment mortgage, but you get more risks for this. You get no guarantees that your investment plan will pay off your outstanding mortgage debt.

There are three main types of investment vehicles to be used to pay off the mortgage capital. The endowment mortgage is where you invest with an insurance company in an endowment policy. This could be a "with profits fund" or a "unit-linked" policy. These policies will grow, hopefully enough to pay off your mortgage leaving you with a lump sum. You could also be left with a shortfall though.

A pension mortgage is where you use the 25% lump sum from your pension fund to pay off the mortgage. You can't get hold of this money until you are 50, and you are not guaranteed that it will be enough, but it is very tax efficient, as you get your highest level of tax relief on your contributions.

Finally, an ISA mortgage is where you pay into an Individual Savings Account (ISA) and hope the fund grows enough to pay off the mortgage. Again, you could have a surplus, but again there are no guarantees. Also, the tax free nature of ISA's is not guaranteed and ISA's may not even exist in a few years time.

Stage 2

Select the method of paying interest

There are three basic choices of how to pay interest: Variable rate, where the rate can go up or down, fixed rate, where the rate is fixed for a pre-determined period, and capped, where the monthly payments have a maximum for a guaranteed period.

The variable rate mortgage alows the interest rate can go either up or down. This means that the interest rate could stay the same for many months, or may change on numerous occasions over the course of a few months. In general, the standard variable rate (SVR) charged by the mortgage lender will mirror the Bank of England Base rate, so you should monitor that rate to suggest what your mortgage rate may be.

You should be wary of a lender with an unusually high SVR. This is especially so, in view of the incentives offered by borrowers to encourage them to take on a variable rate mortgage.

- They could offer a discount for a few months up to a period of a few years. At the end of the period you will revert to the SVR, which can be a shock.

- They may offer cashback, a sum of money towards the fees or charges you have to pay out to get a mortgage. It is likely you'll pay for this with a higher SVR.

- You may be offered specific subsidies for fees or charges.

A Base Rate tracker mortgage is a newer variable rate mortgage, where interest charged is linked entirely to the Bank of England Base Rate, set each month on the first Thursday by the Bank of England's Monetary Policy committee. The rate will usually be at a set level above the base rate (e.g. 1%) for the life of the mortgage.

With a fixed rate mortgage, you are guaranteed to pay a certain level of monthly payments for an agreed period. You can thus budget with a certain amount of confidence as you are protected against rising base rates. The period in which your rate is fixed could be up to 25 years, and as low as 6 months, after which you revert to the standard variable rate for the mortgage.

A capped mortgage is a combination of fixed and variable mortgage. There is a maximum rate over which you will not be charged for a certain period. If the SVR falls below the cap, your payable rate follows it down

You should always ask about redemption penalties should you take on a discounted, fixed or capped mortgage. Redemption penalties charge you for paying off or moving mortgages, and whilst it could be during the deal, it may be after the deal has ended.

Stage 3

Choose your lender

So, you should now have looked at the different types of mortgages you available to you and how interest is charged. You can now take this information and get your mortgage arranged. But who do you go to in order to do this? We will now take you through your options.

The basic choice of where to get your mortgage from is between the building societies, the banks, the insurance companies, specialist lenders or intermediaries.

Should you be looking for a traditional mortgage lender with many years of experience in the mortgage markets, then you should try a building society. This doesn't necessarily need to be a large society, you may find that your local society, whilst much smaller, has some good deals and low rates. However, these local societies also tend to only lend on properties in their local area.

Building societies are owned by their members, who put money in with their savings, and borrow money through loans and mortgages. This means that profits go to the members in the form of good deals, rather than to shareholders. This is what is known as mutuality.

High street banks are owned by shareholders, and are beholden to them, rather to their customers. But they are taking more of a share in the mortgage market and have a major advantage in terms of the number of branches that they have around the country. This means that customer convenience is maybe better. Some large building societies have recently converted to banks, so you can still have access to their mortgage expertise.

Then there are specialist lenders, who cater for specific parts of the market, such as the self-employed or maybe for people with bad credit. They do not have a high-street presence and operate usually from a single office, thus reducing costs, enabling them to provide mortgages for people for whom there may be little other option. You used to only be able to access the products from specialist lenders through intermediaries or broker, but now you can get a mortgage via the internet or over the phone.

Then, should you want to try and save time and money, you can go to a mortgage intermediary. This could be a mortgage advisor or a financial advisor. They will provide you with an overview of the market, enabling you to compare lenders and mortgages in order to find the best on for you. Intermediaries may be tied to one lender, or multi-tied to a few, or could be independent, in which case you have the whole of the mortgage market open to you. Brokers get paid in commission from the lenders, but they may also charge you up to 1% of the borrowed amount.

 

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