How to beat the mortgage blues

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The Independent Online
HOLLYWOOD STAR Nicole Kidman is to act at London's tiny Donmar Warehouse theatre for its standard rate of just pounds 250 a week, the minimum acceptable to Equity, the actors' union.

No doubt Kidman can afford the drop in income. But self-employed people of more modest means can find it difficult to meet the monthly mortgage payments when their income drops away. Mortgage lenders target these people with a range of special loans.

However, Philip Cartwright, of London & Country, independent mortgage brokers, warns that features such as payment holidays often come at the price of an uncompetitive interest rate. He says: "What you should really look at with a mortgage is the bottom-line interest rate they are charging."

Ian Darby, of John Charcol, another independent mortgage adviser, agrees. He compares two loans, one from Alliance & Leicester and the other from Northern Rock Direct. A&L's interest payment holiday mortgage lets borrowers skip one mortgage payment of their choice a year. No interest is charged for the missed month. This is a variable rate loan, and the current rate is 8.95 per cent. Northern Rock Direct's loan will hold its rate below the average charged by five major lenders until at least 1 January 2000 and currently charges 7.29 per cent.

For a pounds 60,000 interest-only loan, that means repayments with the A&L plan would be pounds 447.50 a month but just pounds 364.50 a month with Northern Rock.

A&L's spokeswoman, Michelle Weller, says her company's loan appeals to two groups of borrowers: people who aren't on a monthly salary and don't receive the same amount of money each month and people who have the odd month when there are exceptional expenses.

"There are cheaper deals, but if you need pounds 500 to clear something else that month, it is still a very strong benefit," she says.

Of course, the differential between these two particular loans may change over the years. But Mr Darby points out that the Northern Rock loan has no early redemption penalties, and so borrowers are free to leave if they find a better deal elsewhere. Mr Cartwright is also sceptical about the value of so-called flexible loans, which add some of the facilities of a bank account to your mortgage.

He singles out Woolwich's recently launched Open Plan, which gives borrowers a parallel personal loan with its own Visa card attached. The mortgage loan and the personal loan together can be for up to 90 per cent of the property's value. Both accounts charge a variable rate of 8.1 per cent, implying repayment of pounds 405 a month for our pounds 60,000 interest-only loan.

Mr Cartwright says most borrowers would be far better off taking a cheaper loan and using the money saved, rather than relying on Woolwich's personal loan account. "They're just encouraging people to borrow money when they don't necessarily need it," he says. His own suggestion is a National County mortgage. The building society's standard variable rate is 8.29 per cent but it has a two per cent discount for the first two years. Based on these rates, monthly payments on a pounds 60,000 interest only loan would be pounds 314.50 for the first two years and pounds 414.50 thereafter. All the monthly repayment figures given here ignore Miras, mortgage interest relief granted by the taxman.

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