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Mortgages: Lenders are keen to entice first-time buyers
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The Independent Online
If you have a steady job or can show a reasonable income stream from contract work or self-employment, and do not want to borrow more than three times your annual income, lenders nowadays will do almost anything to oil the wheels and grease your palm as well.

There are four main sources: banks, building societies, direct lenders and mortgage brokers. A local building society may have greater local commitment and involvement. A large national concern, whether bank or building society, offers the security of its size and the convenience of branches all over the country - which can be especially helpful if you're moving into a new area.

The direct lenders offer a different kind of convenience: because all their business is done over the phone it means you can arrange a mortgage from your armchair, and in minutes rather than hours. Examples include Bradford & Bingley Mortgage Direct and Direct Line. Most direct lenders advertise in newspapers or magazines.

Brokers will be able to identify a suitable mortgage for you quickly and may even be able to come up with deals that you can't arrange on your own. However, they will either charge you a fee - around pounds 250 - for their advice, or take commission through selling you an investment product, such as an endowment, linked to your loan. You'll find mortgage brokers through advertisements in newspapers or in Yellow Pages.

All mortgage suppliers will offer first-time buyers plenty of information, but that is precisely why it pays to be reasonably informed before you approach a borrower - so that you can find your way through the mass of detail!

In effect, there are two kinds of mortgage to choose from: repayment or interest-only. With a repayment mortgage, each regular monthly payment includes some interest and some capital repayment, mostly interest in the early years and capital in the later years. Eventually, usually over 25 years, the loan is paid off. A slight disadvantage is that you will need to take out separate term assurance to clear the loan if you die, which is an extra expense.

With an interest-only mortgage, monthly payments only pay off the interest and a separate vehicle needs to be set up to build up capital to repay the loan in one fell swoop when it matures. This is where endowment policies come in.

The endowment policy provides life cover to pay off the loan if you die, plus an investment which builds up, with bonuses, to clear the loan at the end of its term. If you sell the house in the meantime, you can transfer the endowment policy to the next mortgage, or keep it as an investment yourself. If you do not keep the policy you will not get the terminal bonuses that make up a large part of the value.

Many policies are surrendered early, often as a result of divorce or redundancy, which suggests that the endowment may not have been the best choice or that the rules were not understood. If you must cash the policy early, try to sell it instead of simply surrendering it to the insurance company. There is also no absolute guarantee that the bonuses and final sum from the endowment will be enough to clear the mortgage, so it is wise to check the outlook as your loan approaches maturity.

Using a personal pension to cover your mortgage loan can be tax-effective, especially for top-rate taxpayers, because the full contributions qualify for tax relief, but this is not an option available to anyone in company pension schemes. Its main disadvantage is that you will be using some of the cash you have saved to cover your retirement to pay off your mortgage.

Personal equity plans are a more recent addition to the mortgage repayment options, but being made up of stock market investments, either directly or through collective investments such as unit trusts, means they can be high risk. They are tax-effective, you pay no income tax or capital gains tax on gains, but would need close monitoring. If you think one of these two types of loans might suit you, see our more detailed article on these and other unusual mortgage options.

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