Dare to be different

When choosing a mortgage, most buyers stick to what they know, says Stephen Pritchard. But it pays to look around
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The Independent Online

When it comes to financing, most homebuyers think only in terms of a 25-year repayment mortgage. If you feel a little more racy, there is the option of an interest-only loan, perhaps linked to an Isa or other investment. Most buyers do not venture beyond these options. According to the Council of Mortgage Lenders, 80 per cent of home buyers took out a repayment mortgage last year. But the options for financing a home purchase are more varied than the figures suggest.

When it comes to financing, most homebuyers think only in terms of a 25-year repayment mortgage. If you feel a little more racy, there is the option of an interest-only loan, perhaps linked to an Isa or other investment. Most buyers do not venture beyond these options. According to the Council of Mortgage Lenders, 80 per cent of home buyers took out a repayment mortgage last year. But the options for financing a home purchase are more varied than the figures suggest.

Want a mortgage for 50 years? If you are young enough, or happy to work beyond retirement age, that can be done. Are you looking for a five-year mortgage, with a view to paying off the debt with a lump sum? Again, there are plenty of lenders to accommodate that. Do you want to tie your loan to US interest rates, or a basket of foreign currencies? Again, there are companies out there who have products for the select band of borrowers who need such financial flexibility.

"You can have a mortgage with a term of 50 years, although it does depend on your circumstances," says Ray Boulger, a senior technical manager at Charcol, the mortgage brokers. "But a lot of lenders will not allow a mortgage to go beyond retirement age, unless you can prove you will have adequate income in retirement."

Changes to the retirement age will, of course, force lenders to change their policies; banks and building societies also often allow the self-employed to have a mortgage for longer, as they will not be forced to retire. But the best way to take out a very long-term mortgage is to do so at 18. A very long-term mortgage has the effect of reducing monthly payments, at a cost of a far higher total interest bill.

In practice, the difference between monthly outgoings on a 50-year repayment mortgage and an interest-only loan is minimal. Experts suggest that it might be safer to take out an interest-only mortgage and make overpayments.

A short mortgage term has the reverse effect: it costs more each month, but the debt is paid down more quickly cutting the total interest bill. Most lenders have a minimum term of five years, except where a special deal lasts for longer, such as a 10-year fixed rate. Sometimes, borrowers will look for a short-term deal because they expect to receive a lump sum, perhaps from an inheritance or an investment.

On an interest-only mortgage, a shorter term makes no difference to the cost. This means it is sensible to opt for a longer term, perhaps 10 years, and ensure that the loan has no early repayment penalties. A very short-term repayment mortgage might be hard to fund, however, as the monthly payments are significantly higher than for a standard 25-year term.

If a borrower falls behind with payments on a short-term mortgage, they will be in arrears. For this reason, it can pay to opt for a longer term and pay off the debt more quickly through overpayments. Most lenders allow annual overpayments of 10 per cent, even on fixed rates. Flexible and offset mortgages allow unlimited overpayments, but without the tie of fixed, higher monthly outgoings. According to Charcol's Ray Boulger, one area where he sees growing demand is for mortgages that mix and match flexible or fixed deals, or several fixed rates. This could be because a borrower wants security, but also to tie their loan to maturing investments. Newcastle Building Society offers a competitive fixed rate at 5.4 per cent, which can be combined with the lender's offset mortgage. "This allows flexibility and security, but is cheaper than the fixed offset mortgages on the market," says Boulger.

Combining offset or flexible mortgages with a fixed or capped element is becoming popular as interest rates rise. More adventurous homeowners can bypass UK rates by opting for a loan based on US interest rates or foreign currencies. US rates are below those set by the Bank of England, and a handful of lenders, including Accord, part of the Yorkshire Building Society, and Skipton, offer rates linked to the US inter-bank lending rate (Libor). Taking out a mortgage linked to US Libor will give a rate for borrowers to pay of just over 3 per cent in the current market. Borrowers will continue to be better off, as long as US interest rates are below those in the UK. This is by no means guaranteed, and the current US interest rate loans are variable. If the US authorities raise rates, mortgage costs will rise. Interest rates in the eurozone are also lower than in the UK, and borrowing to fund a house purchase in European currencies is an option.

A professional debt management company can run the currency part of the loan, although this will only be economical for large mortgages. Lenders will usually insist buyers put down a 30 per cent deposit, and brokers usually only recommend multi-currency mortgages, in order to minimise the risk. But as currencies can fluctuate as much as 10 per cent over a year, there is a potential for significant savings. Misjudge the markets, and there could be significant extra costs.

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