How to negotiate the mortgage maze

With a frightening array of mortgage products on offer, just how do first-time buyers get a good deal?
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It is easy to understand why mortgages are a subject of fear. The total price of buying a home is astronomical, doing it wrong costs a fortune, yet the range of products available is mind blowing. Just how can first-time buyers make sure they get the best deal?

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It is easy to understand why mortgages are a subject of fear. The total price of buying a home is astronomical, doing it wrong costs a fortune, yet the range of products available is mind blowing. Just how can first-time buyers make sure they get the best deal?

Steve Herbert, a partner at Select Mortgages and Loans, says he will sometimes spend four hours with first-time buyers explaining the difference between fixed, capped and flexible mortgages, not to mention repayment, endowment and investment mortgages, and at the end still not be confident the clients fully understand the choices. "Having said that, a lot of them are more aware than ever before," he adds.

One piece of advice consistently given by brokers to first-time buyers is to avoid mortgage indemnity guarantees (MIGs), also called mortgage indemnity premiums. These surcharges are for borrowers who do not have a large deposit. Some lenders will charge them if lending more than 95 per cent of the home's value, while for others the figure is 85 per cent or even 75 per cent. "Often a lender will say we are lending 86 per cent so will charge MIG from 75 per cent upwards, without telling you that if you put an extra £100 down you can avoid MIG of £1,000," says Mr Herbert.

A growing number of lenders are now not charging MIG. Simon Jones, associate at Savills Private Finance, quotes Nationwide and Cheltenham & Gloucester as having stopped charging MIG on 95 per cent mortgages. "But if you only need to borrow 90 per cent then there are many more lenders out there," he adds. Mr Herbert points to Mortgage Express and Bristol & West as offering 100 per cent mortgages without MIG. "Halifax and West Bromwich now lend up to 90 per cent without MIG," he says.

Ray Boulger, senior technical manager mortgages for John Charcol Brokers, suggests considering mortgages from Nationwide and Intelligent Finance which are MIG-free at 95 per cent "MIG can be 1.6 per cent on a mortgage, so it is quite a big amount," he says. All the brokers say it is often best to go for a MIG-free mortgage, rather than the one with the lowest headline interest rate which charges MIG.

Because of the high potential cost of MIG - and the missed opportunities for the best interest rates if going for 95 per cent or 100 per cent mortgages - Mr Boulger recommends that if first time buyers know they are going to buy a home in a few months, they use that time to get their finances in order and save enough for a deposit.

He also suggests first-time buyers take steps in advance to ensure their mortgage application is accepted. They will have to submit half a year's bank statements, so in the six months before applying there should be no unauthorised overdrafts or exceeding of agreed overdraft or credit card limits.

Applicants will obtain a higher credit score if they have a credit card, even if they do not use it - so potential homebuyers without a credit card might apply for one. They should also ensure they are listed on the electoral register - which is currently being compiled - even if they live with their parents. Not being listed on any electoral register could damage a person's ability to obtain a mortgage.

Ian Stewart, head of mortgage marketing at the Halifax, says it is important first-time borrowers realise they must look at total costs, not just headline interest rates. "The other costs that come with some products, like arrangement fees, can mean the mortgage rate looks better than it really is when you work out what you have to pay."

It may also be worth considering a mortgage that is attached to a credit card, suggests Mr Herbert. A mortgage from Northern Rock at 6.99 per cent will lend at 125 per cent of home value, allowing borrowers to consolidate existing loans into lower rates of interest, and also comes attached to a credit card with a £5,000 limit, which charges interest at the same 6.99 per cent.

But it is choosing between variable, fixed and capped mortgages that is likely to most confuse buyers. Variable rates - closely or loosely linked to the Bank of England base rate - will fall in cost if base rates fall, as they are widely expected to in the medium term. But they will rise if rates rise. If borrowers are already borrowing up to the maximum of what they can afford, it may be worth taking out a fixed or capped mortgage as a form of security to ensure that budgets stay under control.

Nick Carnill, general manager of Cavendish Finance, says there have been contradictory recent changes in the mortgage market. Some of the biggest lenders are now refusing to give mortgages to people they would have been happy to lend to a couple of years ago. Meanwhile, new lenders are entering the market specialising in mortgages for non-status or semi-status borrowers. Many people who have previously been rejected for home loans may now be able to obtain mortgages.

"It is the fastest growing part of our business," says Mr Carnill. "Specialist lenders are bringing interest rates down to normal rates. Several lenders are now looking at products that compare with standard mortgage rates. Platform and Southern Pacific, for instance, look to service people turned down by others." But, he adds, such niche mortgages will normally only be available through a broker.

It may, of course, be possible for you to find competitive standard mortgages without using a broker. It is important, though, to research the market properly to ensure that you are not missing out on an excellent deal. Remember, too, that this is a rapidly changing market and what is the best available product today may be superseded tomorrow.

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