Want to raise the roof? Got to raise the cash

In the last of our series on bargain hunting for property, Richard Phillips looks at perhaps the most critical element in the pot: how to find the money for a new home on a tight budget
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Everybody dreams at some time of owning the perfect home. The dream can often be no more than just a small step up from our current dwelling - hardly shattering, but tantalisingly out of reach, nonetheless. A small cottage in the country, not a palatial mansion, would do us just fine.

Of course, what prevents us realising the dream is money.

Trying to buy a bargain is one way to overcome the obstacles on the way. But even then, you need to make every penny count.

There are only two ways to buy a property: cash, or debt. Cash you either have or you don't. Of course, there are ways to maximise your income, and save towards the great day.

You can also raise cash towards the purchase price, by borrowing separately from your mortgage. This is an often fateful route to go down. Many people secure the cash - often as a deposit on the property - by taking it off their credit card.

Such a ploy may enable you to squeeze through an otherwise difficult hole, if you are finding it hard to obtain funding.

But credit card debts are notorious for spiralling out of control. You will be paying a steep rate of interest, with an annual percentage rate often over 20 per cent - as opposed to the seven per cent on a mortgage.

It is usually far better to try and bring all your funding under one roof, with one lender. There are still 100 per cent mortgages available, if you show you have a good credit record, and the property the loan is secured on is in good condition.

However, before embarking on this course, you should budget carefully. Think about how your income may look in a few years' time. Will it have gone up, stayed the same, or disappeared completely?

Are you planning on having children? Is there growing demand for your job skills, or are you in an occupation with dwindling prospects?

Then look carefully at the impact of a change in interest rates. If interest rates were to double - unlikely, perhaps, but it has happened before - could you afford to keep up the repayments?

Next, look at mortgages which lock you in on a fixed rate of repayments over a certain period of time. At the moment, all the pundits are agreed that interest rates will rise. When is another matter, but most accept that a small rise after the general election is about as close to a racing certainty as you can get. Interest rates have risen after the last seven elections. Even if interest rates were to remain unchanged for the next year, they should then start to rise gradually.

From that point of view, now is about as good a time to take out a mortgage as any, with mortgage rates at their lowest levels in 30 years - one reason why the property market, certainly in the South East, has begun to take off again.

When it comes to taking out a loan, it is easy to opt for the lender with the lowest prevailing mortgage rate. However, this may prove to be a false economy.

If interest rates rise sharply, some lenders are notorious for increasing their rates much quicker than others. These include the so-called centralised lenders, who do not have a branch network, but lend directly to borrowers, and whose deals are promoted by intermediaries and mortgage brokers.

To prevent their mortgage books falling out of kilter, they raise rates quicker. Mortgage policies never state at what rate the lender will raise rates, so you cannot safeguard against whether this will happen or not.

But conventional wisdom suggests that the larger building societies will be the slowest to raise their interest rates, as they have stronger balance sheets and more of a public image to preserve than the more anonymous central lenders.

On the fixed rate trail, these deals at least offer you the certainty of knowing exactly what your payments will be for the next two to five years.

The proliferation of deals can be confusing, and coupled with hidden charges and the like, it can take some time to find the one that is right for you. Visit a few building societies, a couple of banks, and some mortgage brokers, to find out what is on offer.

Abbey National, for example, currently has 11 different cash-backs, a type of deal introduced about two years ago. Cash- backs offer you a lump sum up-front in return for opting for a standard variable rate mortgage. Abbey National offers 5 per cent in cash. So, if you were to take out a pounds 28,000 mortgage, paying the standard variable rate, the bank would then give you pounds 1,400 in cash on completion.

Such deals may sound too good to be true for buyers unaware of just how competitive the mortgage market has become in the past few years.

But for each special offer, the lender is hoping to get something in return. In the case of a cash-back, the lender is locked into the standard variable rate, which tends to be more profitable than fixed-rate mortgages are. And that, in turn, helps boost its market share - the lender is effectively buying market share.

Cash-back deals can be very useful for first-time buyers, who can put the money towards buying furniture, moving or other attendant costs.

Fixed-rate mortgages, by contrast, are extremely useful from a budgeting perspective. Fixed rates are also cheaper than the standard variable rate - the Abbey National charges 6.99 per cent on a five-year fixed rate mortgage, compared to 7.29 per cent on its standard variable rate for loans of under pounds 50,000.

It has also just launched a fixed rate with no tie-in. Tie-ins were a device used to ensure that the borrower did not switch over to another lender, once the period of the fixed rate had expired. Without a tie-in, you have more flexibility to find another cheap mortgage, once the first deal has ended.

Savings can also be made on the other costs associated with buying a new property. If you buy privately, you may be able to cut a deal with the seller, to split the savings on estate agents' fees. You can find vastly differing quotes for conveyancing - although make sure you obtain a good service. Conveyancing is now a cut-throat market, and many solicitors are worried that they are no longer able to provide a proper service, and make a living out of the business. Some are less concerned about the niceties of this dilemma, and the result is poor conveyancing, which can spring nasty surprises on the owner at a later date.

Likewise, a survey is essential, and again you should be able to find a range of quotes. The survey can be an essential guide to defects in the property; inexperienced surveyors, or ones charging less, may not spot all the defects.

Also phone around to find the cheapest quotes for moving furniture and belongings.