Don't gamble if you can't afford to lose

With a bewildering choice of mortgages on offer how do you find one that is suitable for you?
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The Independent Online

Buy anything these days and you face a bewildering choice of products. Mortgages are no different. If you are looking for a home to buy, it is vital to get your mortgage agreed in principle before you start as this gives you a far better bargaining position in a market where you are likely to face stiff competition. So as a first-time buyer, where do you start?

Buy anything these days and you face a bewildering choice of products. Mortgages are no different. If you are looking for a home to buy, it is vital to get your mortgage agreed in principle before you start as this gives you a far better bargaining position in a market where you are likely to face stiff competition. So as a first-time buyer, where do you start?

Find out how much you can borrow Most mortgage providers work out how much they will lend you based on how much you earn. The maximum is generally three times your annual gross salary, if you are buying on your own. For couples, the usual limit is two and a half times your joint salaries, or three times the higher salary plus once the lower.

But many lenders are now willing to lend more than this. Woolwich will advance you up to four times your salary on its flexible mortgage option and Standard Life Bank looks at your finances in more detail to see what repayments you can afford.

Repayment or interest-only? Apart from paying interest on the mortgage, you also have to pay back the original sum you borrow. With a repayment mortgage, you pay back some of the capital each month in addition to the interest.

Alternatively, you can have an interest-only mortgage and run an investment plan alongside it, such as ISAs (Individual Savings Account), endowment policies or pensions. The idea is by the end of the mortgage term, the investment will have grown enough to pay off the amount borrowed. But these mortgages are less popular than they were and many borrowers have recently been told that their investments are not growing fast enough. In the last three months of 1999, about twice as many borrowers took out repayment mortgages as opted for endowment loans, according to the Council of Mortgage Lenders.

Interest-only mortgages made more sense when inflation was higher as rapid rises in the cost of living erode the real value of loans. But with interest rates down to between one and two per cent compared to about 10 per cent in 1990, repayment mortgages are winning popularity.

Fixed, discounted or variable interest rate? Whichever way you choose to pay off your mortgage, you still have to pay interest on the loan. You can pay interest at the standard variable rate, which should move in line with base rates set by the Bank of England, or you can go for a fixed or discounted rate. A fixed rate is set from the start and will not change for a specified number of years. A discounted rate fluctuates like the standard variable rate, but is always a few percentage points below.

Fixed rates usually suit borrowers who are stretching themselves, such as first-time buyers, says Patrick Bunton of independent financial advisers London & Country Mortgages. "Don't gamble with money you can't afford to lose," he says. But if your mortgage is only a small part of your disposable income and you can afford higher repayments if interest rates rise, then you could choose a variable rate mortgage. After all, fixed and discounted rate mortgages often have penalties for early redemption.

Look at the small print Terms and conditions of mortgage deals can seem complicated, but you have to take them all into account when comparing the loans on offer. "Don't be swayed by the headline rate," says Siobhan Hotten of mortgage brokers John Charcol.

Redemption penalties should be considered and some lenders, particularly if you borrow more than 95 per cent of the value of the property, will make you pay a Mortgage Indemnity Guarantee (MIG), which can be around £1,500. Many deals, especially for first-time buyers, offer free legal fees and valuations, which can add up to £500. Arrangement fees, typically £300, may be payable on application or completion, says Ms Hotten. But because house purchases commonly fall through, it is better to have a mortgage where this fee is not charged until completion.

How do you choose a lender? You could speak to a handful of high street lenders but this is a time-consuming process and you may still be missing out on a better deal.

Do your own research, by reading personal finance magazines or looking at best-buy mortgage tables within money sections of the weekend papers. Financial data provider Moneyfacts publishes lists of terms of mortgages on offer.

Try the Internet too. Moneyextra has up-to-date details of deals from 120 mortgage providers, and through its free mortgage-selection process you can find both a suitable lender and a deal. The service is available on Moneyworld and Yahoo Finance. Mortgage broker John Charcol runs a free loan-finding service called Charcol Online.

Consulting an IFA is a good option although they usually hope you will buy commission-heavy life insurance. Many will charge you nothing for finding a mortgage - they receive a procurement fee of between £100 and £300 from the lender.

London & Country Mortgages: 01225 408000.

John Charcol publishes a free guide to buying your home: 0800 718191. Moneyfacts: 01603 476100.

www.charcolonline.co.uk

www.yahoo.co.uk

www.moneyworld.co.uk

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