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Should I opt for a fixed rate or one of the discounted variable rate products?

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Should I opt for a fixed rate or one of the discounted variable rate products?

There is not a straightforward answer to this question and the response will depend on a number of factors. The first thing to consider is what do you feel is going to happen to interest rates over the next few years. Will they increase, decrease or remain the same? This is where you have to use your crystal ball as the truth is that no one knows.

If you feel that interest rates will rise then you should opt for a fixed rate as this will protect you against these increases. On the other hand a variable rate will allow you to take advantage of reductions in rates if they fall. If you are really unsure about this then look at capped rate schemes as these can give you the 'best of both worlds' - the interest rate will be capped at a set level so that the rate cannot rise above the capped rate but on the other hand if the normal variable rate falls below the capped rate then the variable rate will be payable. The catch with capped rate schemes is that the 'cap' is generally fixed at a higher level than a fixed rate for a similar period of time.

The other point to consider is your own personal circumstances. If you are pushing yourself to the limit with your new mortgage then you can't really afford to gamble on rates rising. In this case it would make sense to opt for a fixed rate as you will then be sure that you will be able to meet the repayments.

What about the cash back deals on offer?

Are they worth considering? There are certainly some very attractive cash back products on offer from time to time and you need to consider whether they meet your own personal requirements. Most of the very large cash back offers rely on the fact that the lender is offering you the cash back at the expense of any other incentives. This means that they will charge you the normal variable rate (or sometimes a slightly loaded rate ) for the privilege. This is fine as long as you are happy to accept a variable rate and happy that you could still meet the repayments if interest rates rise. Remember, that these deals will impose redemption penalties on you which will normally mean that you will have to repay the cash back if you wish to move to another lender in the first few years.

Also look at the value of the cash back. If , for example, the lender is offering you a cash back of , say, 5% of the mortgage amount then compare that with the discounted rates on offer. If you can get a discount of 2% off the normal variable rate for three years then the total discount will amount to 6% so you will then need to decide whether you would rather have all the money up front or spread over the three years. If you take the cash back is that worth giving up the additional 1% saving on offer with the discounted rate.

The last point to remember when considering a cash back deal, particularly if it is a large cash back is that the proceeds could be liable to Capital Gains Tax. It is unlikely, in most cases, that this will apply as the annual exemption limits will cover most cash back amounts. If other gains are made in the year, however, there could be some liability. If you have any doubt then you should speak to an accountant or your local tax office before proceeding.

I am a first time buyer and think I will need a 100% mortgage. What options are there for me?

The first point to consider here is that most of the 100% mortgages on offer from lenders are not as attractive as those deals on offer to other borrowers. 100% lending is considered to be high risk by the lenders which is why most lenders require a personal stake from the borrower. Because of the increased risk you will find that the lenders prepared to lend in this market impose very strict conditions on who they will lend to and only the best risks will be accepted. Certainly any poor previous credit history will exclude you as will frequent job or home moves. Lenders like to see stability and a short time with a current employer will cause difficulty.

The other point to consider is that with most lenders there will be a large Mortgage Indemnity premium to pay in connection with a 100% advance. This is the premium that lenders charge for high percentage lending. This premium is used to buy insurance cover for the lender which will protect them in the event that you default on the mortgage, they repossess the property and they make a loss when that property is sold. This insurance is of no benefit to you the borrower but nevertheless you will be required to pay the premium. What is worse is that if the scenario outlined here actually occurs and the insurance guarantee is called upon by the lender then the insurer can still come after you, the borrower, to recover the amount they have paid out.

What this means in hard cash terms is that, say for example you take a 100% mortgage of £60,000 then the indemnity premium you will have to pay will amount to approximately £1800, in addition you will probably have to pay an arrangement fee to the lender of about £200. These costs may be added to the mortgage or paid by yourself. If you choose to pay them yourself then you are putting in over £2000 but to make the mortgage a 95% mortgage you would only need to find an additional £1,000 and you could then take advantage of a whole host of attractive deals which would save you considerable amounts over the first few years. On the other hand if you really cannot afford to put down any money at all then you could arrange for the indemnity premium and arrangement fee to be added to the mortgage, but, you should then be aware that you are immediately in a negative equity situation with a mortgage of £62,000 on a property valued at £60,000. You are then reliant on price increases to move you out of this situation.

The other way to look at 100% finance is to apply for a 95% mortgage but go for one of the deals which offers a cash back on completion. There are deals available currently which will give 5% or 6% of the mortgage back on completion which represents the deposit required. This has the advantage of reducing the mortgage indemnity premium by about half and you should obtain a better interest rate. The only snag with proceeding down this route is that you will need to find the 5% deposit temporarily as you will need to pay this when you complete whereas you will not receive the cash back until after completion.The third and final option is to take a 95% mortgage and arrange a top up through a second lender for the balance. Some brokers will have schemes to cater for this and this can mean that you achieve a cheaper rate on the 95% mortgage although you may have to pay slightly more on the 5% top up. However, when the two rates are averaged out over the whole mortgage there are some quite attractive deals to be had. Always remember to check out all the fees and be clear which of these fees you need to pay yourself and which can be added to the mortgage.

I have an endowment mortgage at the present time. I am now moving/re-mortgaging and will be borrowing more this time. Should I stick with my endowment policy, take out a new endowment policy or surrender my policy and start afresh?

Many people have an endowment mortgage and there has been a fair amount of adverse publicity in recent years concerning these policies and their ability to repay the mortgage at the end of the term. Most of the problems have arisen with policies which have been taken out for relatively short periods of time (15 years or less) although not all these policies will fail to perform. Many endowment policies have performed very well in the past and have produced nice surpluses on maturity and no doubt many policies will continue to do so.It is very rare that the best advice is to surrender a policy and if there is any doubt about the policies ability to meet the mortgage debt at the end of the term then the insurance company should be able to calculate whether or not the policy is on track taking into account existing bonus rates. Ask the insurance company concerned to calculate this for you and if there is likely to be a shortfall you can then take action to overcome this. The other thing to remember is that you should ask the insurance company to carry out this check every 5 years or so to ensure that the policy remains on track. Most new style policies taken out today actually build in these regular reviews automatically but with many older policies the onus will be on the policyholder to ask the question.

Assuming that you have taken this action and have now decided to retain the existing policy you must now address how you are going to deal with the balance of the advance. The options here are numerous. You could take out a new endowment policy to cover the balance of the advance or you could decide to pay the balance of the mortgage using another method of repayment. You could, for example, choose to repay the new portion of the mortgage using a capital and interest mortgage in which case the debt on this portion of the mortgage will gradually reduce throughout the term. Alternatively, you could opt for an interest only repayment on this part of the mortgage and rely on other investments to repay this part of the loan on maturity. If you opt to take the interest only option then you need to be clear that at the end of the mortgage term the onus for repaying that part of the mortgage will be on you. Some people will deal with this by realising other assets, or maybe the end of the mortgage will coincide with your retirement at which stage you may decide to move to a smaller, cheaper property and pay the balance off from the surplus proceeds realised from the sale.

Many people, however, will prefer to have a more structured approach to the repayment of the mortgage and in this case you could consider taking out a Personal Equity Plan with the aim of producing the cash lump sum on maturity of the mortgage. To make sure that you are aware of all your options you should consider talking to an Independent Financial Adviser who will be able to discuss the options with particular reference to your own personal circumstances - if you do not have an IFA that you have used in the past then ask friends and colleagues for recommendations or failing that you will find a list of IFA's in the Yellow Pages. Remember that the existing endowment policy will provide you with life assurance for that part of the mortgage but for the new portion of the mortgage you will need to take separate life assurance cover if that part of the mortgage is to be covered.

Finally, if you are really set on a surrendering an endowment policy do not do this without first considering selling the policy as an alternative. There are companies that specialise in the second-hand policy market and they will often offer considerably more for a policy than the surrender value. Again a local IFA should be able to point you in the right direction or obtain comparable quotations for you.

What type of mortgage should I take? - endowment, pension, pep, repayment, interest only?

Much is written about the different merits of each type of mortgage and the choice will depend greatly on your own personal circumstances, your attitude towards risk and other factors. There are, however, some basic facts about each type of mortgage which may assist you in making up your mind. If you are still undecided then you could talk to an Independent Financial Adviser, mortgage broker or direct to some of the lenders. They should be able to help you to form an opinion but, remember, always talk to three or four people and get several alternative quotations.

Endowment mortgages - An endowment mortgage is basically an interest only mortgage that is supported by an endowment policy. During the term of the mortgage you will only pay interest to the lender so the outstanding mortgage debt will remain constant throughout the mortgage term. In addition to the interest you pay to the lender you will also need to pay premiums into an endowment policy.

An endowment policy is basically a savings plan which is designed to produce the mortgage amount at the end of the agreed term (normally 25 years but can be shorter). Most endowment policies taken out in connection with a mortgage do not guarantee to repay the mortgage debt at the end of the mortgage term so there is a possibility that there could be a shortfall. The eventual value of the policy will depend on the performance of the fund in which your premiums are invested so poor performance could result in the eventual maturity value being insufficient to repay the mortgage debt. On the other hand, however, a fund that performs well could produce a ,maturity value which exceeds the mortgage amount and this surplus would then be paid over to you. Most new policies, these days, build in a regular review of the policy performance so that any anticipated shortfall can be dealt with at the earliest stage. This may mean increasing the policy premiums or taking other action to cover any projected shortfall but provided the recommended action is taken the policy should be put back on track.

In addition to the investment value of the endowment policy it will also provide life assurance cover for the policyholder which will repay the mortgage in the event of death within the policy term.

The final point to consider when taking an endowment mortgage is that the endowment policy is designed as a long term investment and the policy will be designed to be run for the full term. Whilst policies have become more flexible in recent years they will still represent poor value for money if surrendered in the early years and you could find that you get back less than you have invested.

Pension mortgages - Pension mortgages are again interest only mortgages but this time supported by a pension plan rather than an endowment policy. As with the endowment mortgage you will pay interest only to the lender and at the same time you will pay premiums into a pension plan. This is only an option for someone who is either self-employed or in non-pensionable employment.

The most common type of pension plan to be used is a personal pension plan and this will be designed to pay a tax free lump sum on retirement in addition to a monthly pension income. It is the lump sum (or part of it ) which is then used to repay the mortgage debt on retirement.

The advantage of this type of repayment method is that the pension contributions attract tax relief at the persons highest rate of tax. This means that for a 40% tax payer every £100 of contribution only costs £60 from net pay. In addition the pension fund itself benefits from certain tax breaks and so it should grow at a faster rate than other forms of investment. However, it is also important to remember that unlike an endowment mortgage, a personal pension policy does not provide automatic life assurance cover and this will need to be arranged at an additional cost.

The disadvantages of this method of repayment are threefold. First, the eventual value of the pension provided and the lump sum available will depend on the performance of the pension fund into which your premiums are invested. In other words poor performance of the fund could result in a disappointing final pension and smaller than anticipated lump sum ( equally better than expected performance will result in a larger pension ). Most pensions are, however, reviewed annually so that the performance can be tracked. The second disadvantage is that the tax free lump sum available under the pension plan is not available until the pension itself is taken. This means that the mortgage term needs to be run until the anticipated retirement age. If the intended retirement age is 60 and you are considering taking a pension mortgage at age 30 you will therefore be looking at a 30 year mortgage term which will result in considerably more interest being paid into that mortgage than if a 25 year term were taken. The third disadvantage is that you will be using part of your retirement benefit (i.e. the cash lump sum - or part of it ) to repay the mortgage debt on retirement. This will obviously reduce the value of your retirement benefits.

Pep mortgage - A Pep mortgage is again an interest only mortgage with the lender accepting interest payment only during the term of the mortgage. Once again the level of the mortgage debt will remain constant throughout the mortgage term.

In addition to the interest payments made to the lender premiums will also be paid into a Personal Equity Plan which is designed to return the mortgage amount at the end of the mortgage term or before. However, there are no guarantees attached to the future performance of the Pep fund so the monthly premium is calculated by making assumptions about future growth rates. It follows, therefore, that under performance of the fund could result in a shortfall at the end of the mortgage term. On the other hand a better then predicted performance could result in early repayment of the mortgage debt or a surplus at the end of the mortgage term.

Pep's are being replaced with the new Individual Savings Accounts in April 1999 and after 5th April no further payments will be allowed into a Pep. However, existing investments will be allowed to continue. It should be noted that a Pep does not include any element of life assurance cover and as such this needs to be taken as a separate policy if it is required.

Repayment mortgage - A repayment mortgage can also be called a capital and interest mortgage. With a repayment mortgage each monthly repayment made to the lender includes a portion of the original capital sum borrowed and the remainder represents interest charged by the lender. In the early years when the mortgage debt is highest most of the monthly payment represents interest with only a small part being used to reduce the debt. However, as the mortgage debt gradually reduces, the interest payments become smaller and the capital part bigger until eventually the role is reversed and the largest part of the repayment represents capital and only a small part interest. Because of this factor the mortgage debt reduces slowly in the early years so the reduction in debt bears no relation to the total payments made.

With this type of mortgage, provided all the due payments are made on time, the mortgage is guaranteed to be repaid at the end of the mortgage term. In addition it is often possible to either reduce or extend the term of the mortgage from that chosen originally. This can be important if, say, interest rates were to rise making the repayments difficult to meet. Most lenders will, in these circumstances allow the mortgage term to be extended temporarily which will help to alleviate the problem until such time as the increased commitment can be met or interest rates decrease again. At that time the mortgage term can be adjusted down again to the original remaining term. On the other hand some people may find themselves with additional spare cash each month which they would wish to use to pay the mortgage off more quickly. Again, in these circumstances most lenders will agree to reduce the term of the mortgage to allow it to be repaid more quickly.

Life assurance is not included with this type of mortgage and if this is required it will have to be arranged separately at additional cost.

There are a lot of very attractive mortgage deals available but what are the catches?

Most lenders are offering some very competitive and attractive rates to attract new business. A few of these lenders will also offer the same deals to their existing borrowers although most lenders restrict the best of the deals to new borrowers.

There are, however, a number of points to watch out for and this will ensure that you get the very best deal for your own personal circumstances. The first thing to remember is that many of the deals on offer are promoted as 'loss leaders' simply to attract new business. With this in mind most of these lenders would hope to keep you as a borrower beyond the initial incentive period so that they can recoup their loss. You will find that most of the very attractive deals, therefore, impose early redemption penalties if you wish to repay the mortgage within the incentive period and, often, beyond. This is the first thing to watch for. Once you have highlighted a good headline rate look at the redemption penalties and try to find the lowest penalties with the shortest period of time. You may ask why is this so important? Well, if there are no redemption penalties to consider when the initial incentive period is up, then you are free to reassess incentive deal.

The second point to watch out for are insurance products that the lender requires you to take as a condition of getting the mortgage. Some lenders may, for example, require you to take a combined buildings and contents insurance through them or may make it a condition that you take out an accident/sickness and unemployment policy. In most cases it will make sense to take one or both of these policies but look at the cost and get some alternative quotations. If the lenders buildings and contents policy is twice as expensive as you can buy elsewhere then you may find that this erodes the benefit of the attractive rate on offer. Take these costs into account before making your decision.The third point to watch for are the arrangement fees charged to access these deals. In most cases the arrangement fee is between £200-£300 but some lenders will charge a percentage of the mortgage taken which can work out expensive on a larger mortgage.

Once you understand these points you should be able to make an informed choice taking all the relevant points into account. Remember, always get a written quotation before proceeding and make sure that this shows all the up front costs, the terms and conditions of the recommended product and the monthly repayment costs.

How much can I borrow?

The amount that you will be able to borrow will be related to two factors. First lenders will have a maximum percentage of the property price/value that they are prepared to lend. This is shown as the maximum loan to value (LTV) and is a non-negotiable figure. In general terms the maximum LTV will reduce as the property price increases - i.e. a lender may be prepared to lend up to 95% on a property valued up to £60,000 but will then reduce the maximum to 85% up to £100,0000 and maybe 80% over £100,000.

The second factor that will govern the amount you can borrow is your income. Lenders will generally have a set formula for working out how much they are prepared to lend in relation to your income and this will be expressed as a multiple of income - i.e. 3 times a single salary or 2.5 times joint salaries. However, two lenders with the same income multiples will not necessarily arrive at the same maximum figure as, in many cases, the amount of annual income can be interpreted in different ways and some lenders are more flexible than others. For example, if part of your income includes bonuses, overtime, or commission then most lenders will take 50% of these payments into account when arriving at the salary amount. However, some lenders may be more generous than this and take a larger percentage, particularly if you can show that this is a permanent feature of your income and you can show a long track record of receiving these payments. As a general rule of thumb, however, it is sensible to expect lenders to take 50% of these payments if they are regular but not guaranteed. If these payments can be shown as being guaranteed and part of your contractual arrangements then many lenders will be prepared to take all the additional sum into account.

The other area where lenders can differ in their interpretation of the amount of mortgage available is if you have credit or other debts outstanding. Many lenders will deduct the annual payments in respect of any credit agreements from annual salary before applying their income multiple. If you have any existing commitments such as bank loans H.P. or you pay maintenance to an ex-spouse then you need to deduct these payments from your annual salary before applying the multiple. Here again, however, some lenders will be more flexible than others.

To summarise you will find that the maximum LTV quoted is a non negotiable figure but many lenders are open to discussion and negotiation on how the income calculation is applied.

I am self-employed. How will this affect my application?

If you are self employed then most lenders will need to ascertain what your annual income is and whether the business that you are running is stable and likely to be able to sustain your level of income for the foreseeable future.Lenders will differ in their requirements and as with employed applicants some will be more flexible than others. As a general rule of thumb you should expect the lender to ask to see the last three years audited accounts and they may also wish to see a projection for the coming year from your accountant. If the business is shown as stable and there is an upward progression of the net profit then most lenders will be satisfied with this and will either take the last years net profit or an average of the last three years If the business is a limited company then the lender will look at a combination of drawings and net profit ).

The problems occur where the applicant either does not have three years accounts or where the net profit has been erratic or declining. In both of these cases some lenders are more sympathetic than others - a few lenders may accept two or even one years accounts and an erratic net profit may be acceptable, although a very good explanation would be required to satisfy the lender. If a lender cannot be found because the accounts are not available or are not acceptable to the lender then it is worth considering a self-certification or non-status mortgage. This will only be available to you if you have a fairly large deposit and it will normally involve you in putting down at least 20% of the property price yourself. If you can manage this then some lenders will allow you to simply declare your income on the application form and no further confirmation will be required. The other credit checks will, however, be carried out so this approach is only worth considering provided all other credit checks will prove to be satisfactory.

I have had financial difficulties in the past. How will this affect my application?

The answer to this question depends on the extent of the difficulties and how long ago they occurred. Financial difficulties can affect people in different ways, it may be that an existing mortgage has been allowed to go into arrears, or other loans have been defaulted on. If it is mortgage arrears that have caused the problem then lenders will generally expect to see the existing mortgage account brought up to date and maintained up to date for a period of 6 - 12 months.

If other loans have been defaulted on then your success in obtaining a new mortgage will depend, to a large extent, on the seriousness of the problem. If you have County Court Judgements registered against you then these will cause you a bigger problem, particularly if there is more than one judgement. Many lenders will refuse to lend outright in these circumstances although some will consider an application provided the Judgements have been settled and a satisfactory explanation is forthcoming.

Finally, there are a few lenders that specialise in this area of the market and are prepared to lend where the more conventional lenders have declined. To access these lenders you may need to use a reputable mortgage broker or Independent Financial Adviser.

What types of properties are generally unacceptable as mortgage security?

As with all other areas of underwriting, different lenders have different views on the types of property on which they are prepared to lend. As a generalisation, however, you will find that most lenders will have difficulty with the following types of property 1.Freehold flats or maisonettes 2.Prefabricated buildings 3.Mobile homes and houseboats 4.Property with an element of flying freehold 5.Property which is suitable for multi-occupation - i.e. multiple kitchens etc. 6.Property in an area of ex-local authority housing with an owner occupied rate of less than 50%. 7.Flats above four storeys (although this does depend on the quality of the block and the area). 8.Steel framed property. 9.Property of concrete construction. 10.Properties under 10 years old without an NHBC/architects certificate. 11.Property with an element of agricultural restriction or an agricultural tie.

This list is by no means comprehensive and if there is anything unusual about the property you have in mind then it is worth discussing this with the lender at an early stage and before you have parted with any fees. For example, if you are aware that the property has suffered from structural movement in the past then it is worth mentioning this as the lender may be able to discuss the exact circumstances with their surveyor before parting with the survey fee. In that way, if the property is obviously going to be unacceptable, then you have not wasted your survey fee.

What happens if I cannot afford to maintain my mortgage repayment?

It is obviously very important that you do not over-stretch yourself when taking out your mortgage. Always remember that interest rates can rise and, even if you are taking a fixed rate mortgage, consider what will happen when the fixed rate finishes. It is always sensible to recalculate your monthly payments at a higher rate of interest so that you are aware of the effects of any increase in interest rates.

However, no matter how careful you are there may be circumstances beyond your control that could put you into difficulty. The first thing to remember if you are experiencing a difficulty in meeting your repayments is to talk to your lender. Most lenders will be as helpful as possible and they will normally be able to come to an arrangement with you whereby a reduced payment can be accepted for a period of time, particularly if the difficulty is a short term one. Alternatively, if you have a capital and interest mortgage, you may be able to extend the number of years over which it is repaid thereby reducing your monthly commitment. REMEMBER - DON'T IGNORE THE PROBLEM - TALK TO YOUR LENDER.

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