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1. General Mortgages

Most Lenders offer a range of mortgages designed for customers who meet their standard or general lending criteria. You'll find these in the "Which type of mortgage will suit you?" section of this guide and it includes flexible mortgages as well as fixed rate, capped rate, tracker rate, discounted rate and variable rate mortgages.

These general mortgages are available to you if you're buying for the first time, moving home or looking to remortgage - move an existing mortgage to a new lender to get a cheaper deal. Simply choose the one that suits you best.

2. Self-certified mortgages

There was a time when almost everyone worked from 9 to 5 in a 'job for life'. That was a generation ago, and things have changed since then. These days, far fewer people work this way and employment is increasingly cyclical, so many people are on irregular incomes or short-term contracts. This can cause problems when it comes to getting a mortgage because most lenders like to see proof of income or audited company accounts.

A self-certified mortgage is different. You needn't show all the normal proof of income, such as wage slips or business accounts, and no checks are carried out with employers or accountants. You simply state your income on application; this means that the whole process is surprisingly straightforward.

A self-certified mortgage is probably for you if:

• You are self employed
• On a short term contract
• Find it difficult to evidence all of your income - as you might be getting payments from a previous spouse or from the government.

You'll usually need to put down a bigger deposit or have more equity in your property to qualify for a self certified mortgage and you will also need to keep to all the lender's other conditions. The interest rate may be higher too.

Self certified or special status mortgages can overcome the problem of providing proof of income - although some mortgage providers who state that no income proof is required, reserve the right to request proof in some cases. This is their way of preventing fraud.

3. Credit Solution mortgages

It's sad but true that sometimes some people experience problems with bad credit. They may have County Court Judgements registered against them. They may even have been bankrupt in the past. As a result, these individuals often have trouble obtaining a mortgage simply because they do not fit within the strict lending terms.

Things are changing. Lenders now consider applications individually and on their own merits rather than using such strict lending criteria. That means that more lenders are likely to consider your case if you have any of the following:

• Credit Problems and defaults or County Court Judgements (CCJ's) registered against you.
• Entered into an Individual Voluntary Arrangement (IVA).
• Fallen behind on payments resulting in mortgage arrears through various reasons including divorce and redundancy.
• Been made bankrupt

Or maybe you need a little bit of each.

Sometimes people need to mix some of these features, for instance a self employed individual has clients who pay late and has had credit problems as a result, but still needs to self-certify his income.

Which repayment method should you choose?

Now let's look at ways you can repay the loan itself. There are three main options: a repayment mortgage, or an interest-only mortgage, or a combination of a repayment and interest-only mortgage.

Option 1

• Repayment mortgages
  
  
  • In the early years, most of your payments just cover the interest.
  • You pay off the capital slowly in the early years.
  • You will repay the loan if you keep up the necessary payments.
  • No investment or life cover is built into a repayment mortgage.
    

A repayment mortgage works in the same way as most types of loan. You make regular monthly payment to a lender. This payment will be made up of capital (in other words, repaying the ongoing amount you've borrowed) and interest.

In the early years of a repayment mortgage most of what you pay goes in interest. As the loan progresses, more and more of your monthly payment goes towards repaying the capital.

For example, on a 25-year mortgage of £50,000 with an interest rate of 7.5%, you'd still owe £45,727 after five years and £39,594 after ten years - (however this does not include the other charges you pay with a mortgage). The longer the term of the loan, the less the capital you pay off in the early years.

This can be a disadvantage if you move home several times and change lenders each time, because the temptation might be to take out a new 25-year loan every time you move, but you can easily avoid this by asking for a shorter repayment period each time, to keep your original repayment date the same.

On the plus side, you will definitely repay the mortgage at the end of the term as long as you make all of the payments.
They're also flexible. If you think you might decide not to own a home in the future (for example, if you plan to live abroad), a repayment mortgage is worth looking at.

Some lenders allow you to make extra payments on your mortgage. Check whether they work out the interest due on the reduced mortgage immediately or et the end of their financial year. This will help you see when the change in your repayments will begin.

Life cover is not automatically included with a repayment mortgage. So, when you're buying a home with a partner or if you have a family to think about, you need to make sure the loan can be paid off in full if you or your partner were to die or suffer a 'critical illness'.

So long as you always keep up the correct payments, at the end of the term you will have repaid the loan in full.

Option 2

• Interest only mortgages
  

With an interest only mortgage, your monthly payments to the lender cover only the interest on the loan (i.e., they don't repay any of the capital). The full amount of the loan has to be repaid to the lender at the end of the term.

To ensure you can make this final payment, you invest additional funds in investments which are designed to generate enough (preferably more than enough) capital to repay the loan at the end of the term.

There are a number of different options available, including an endowment or a pension or an ISA.

• Endowment
  

With an endowment mortgage you make your monthly repayments of interest to the lender and as well as this you make contributions to an insurance company to fund a savings plan. This savings plan aims to generate sufficient funds to pay off the capital at the end of your agreed mortgage term.

The savings plan can be "with profits", "unit-linked" or a combination of them both.

"With profits" policies pay two types of bonuses. A "reversionary" bonus is usually paid into the savings plan each year and, once awarded, is usually guaranteed provided the policy is still active on the maturity date. A "terminal" bonus is awarded on the policy maturity date and its size will depend on the performance of the fund over the lifetime of the policy.

With "unit-linked policies", the value is driven by the underlying value of the investments when the policy reaches maturity (but you can often swap into safer investments a few years earlier if you wish). If you die before the term is complete, the life insurance aspect of the endowment policy is used to clear the loan.

The good thing about an endowment repayment vehicle is that you can maintain the policy if you move house or change mortgage provider. Endowments can include some kind of life and critical illness cover which is usually cheaper than buying such cover separately. If the underlying investments perform well, you may get more than is needed to pay off the loan.

But if the underlying investment performs poorly, you could end up having to review the premium subscriptions to your endowment policy and/or the basis on which your mortgage is operated in order to ensure that the mortgage loan can still be repaid in full at the end of the agreed term.

• Pension
  

With a pension repayment vehicle, you make your monthly repayments of interest to the lender and you also make contributions to a personal pension. This personal pension then provides a tax-free lump sum as well as a taxed regular income at retirement. Most, if not all, of the lump sum is used to clear your mortgage loan at that date.

On the good side, pension contributions qualify for tax relief of up to 40% (for a higher rate taxpayer), which boosts the value of every pound you contribute to your pension.

However, using your tax-free lump sum as a mortgage repayment vehicle may leave you with inadequate income in retirement. Also, the lump sum is payable on retirement, so your loan term may be more than 25 years (depending on how old you are and when you are planning to retire!).

The biggest problem is that poor performance could adversely affect the amount of the tax-free lump sum resulting in insufficient funds available to repay the loan at the end of the agreed term.

• ISA
  

With an ISA repayment vehicle, you make your monthly repayments of interest to the lender and you also make contributions to an Individual Savings Account (ISA). Like the PEP mortgages which preceded them, ISA mortgages use stock market-based investments for tax-free growth.

There are two main types of ISA: "mini" and "maxi". There are different rules over contribution levels and range of investments available in each. If you take an ISA as a repayment vehicle you are also likely to be required by the lender to take out term assurance to cover repayment of the loan if you die early.

On the plus side, if your ISA performs well, you may be able to pay off your mortgage early.
However, a stock market crash could leave your investment in trouble and could mean there won't be enough to repay a large mortgage at the end of the term.

You must keep up the payments or you are unlikely to build up enough to repay the loan. The investment plan you use is not guaranteed to pay off the loan and you will have to make up any shortfall.

Option 3

• A combination Mortgage
  

Some lenders may allow you to combine both repayment methods. For example you may have taken out an endowment mortgage for your first home for £60,000 and now you are buying your second home at a cost of £150,000.

You may want to you're your £60,000 endowment until the policy is due for payment, but borrow the extra funds required as a repayment mortgage. If you are a first time buyer you can use an existing savings policy such as an ISA to contribute towards a combination mortgage.

Which type of mortgage will suit you?

Once you've decided on whether you are going to make payments on the capital or not, you need to turn your mind to interest rate options. There are many different ways of calculating the interest due - all of which have their advantages and disadvantages, depending on your circumstances. Add to this a number of other special types of mortgages - and you have a lot to choose from.

• Standard variable rate (SVR)
  

The simplest form of loan is one which sets its interest rate according to the lender's standard variable rate, or SVR. With a loan like this, your interest payments are likely to rise or fall every time there is a change in the Bank of England's base rate. However, lenders don't always pass on the change in Base Rate - this can be to your disadvantage if the rate falls but your interest rate doesn't.

Most borrowers are transferred to their lender's SVR once their initial, promotional rate period comes to an end.

Pros:

There are usually no early repayment charges on these loans.

Cons:

The unpredictability of interest rate movements makes it hard to plan your finances, and the costs of your mortgage may rise rapidly if interest rates go up.

• Discount rate

A discount mortgage offers a reduction ("discount") of a given amount on the lender's standard variable rate. If the SVR changes, the rate you pay will fluctuate in line with the change but at the same level of discount (e.g. 0.5% below SVR).

Usually, the greater the level of discount, the shorter the period the discount will be applied for. After the discount finishes, the loan reverts in most cases to the lender's SVR.

Pros:

You can make a significant saving on the standard variable rate.

Cons:

Discount mortgages often incorporate significant early repayment charges which may make it expensive for you to remortgage to another rate or lender.

• Fixed rate
  

A fixed rate loan charges a set rate of interest for a predetermined period, and then usually reverts to the lender's standard variable rate. The fixed rate will often be very competitive, however when you revert to the lender's standard variable rate you'll find that this could be much higher.

Pros:

A fixed rate loan offers you the security of knowing how much you'll be repaying during the initial period which can make budgeting much easier.

Cons:

If the Bank Base Rate is dropping, your fixed rate may actually prove to be more expensive than a discount or tracker rate. E.g. you may tie in to a fixed rate which is the "best ever" but the market may continue to drop, leaving you on a higher rate but unable to move due to early repayment charges.

An example of a fixed rate (as at February 2005):

4.85% fixed until 28 February 2007, then reverting to the lenders standard variable rate at that time. Early Repayment Charges apply if you remortgage early.

• Capped
  

A capped rate will not rise above a certain level for the cap period - offering similar security to the fixed rate. You can have confidence that your interest rate will not exceed the cap, whatever happens to the lender's standard variable rate. The initial rate is usually competitive; however, the deal will often also incorporate early repayment charges.

Pros:

A capped rate offers you the security of knowing how much you'll be repaying during the initial rate period, which can make budgeting much easier.

Cons:

As a payback for the security of the capped rate, rates are often higher than a fixed rate and the initial cap term seldom lasts longer than 2 to 5 years.

An example of a capped rate (as at February 2005):

4.75% capped until 31 March 2010, then reverting to the lenders standard variable rate at that time. Early Repayment Charges apply if you remortgage early.

• Tracker
  

A tracker rate gives you the certainty of knowing the rate you pay will move automatically in line with Bank of England Base Rates. You benefit straight away from any reduction in the Bank of England Base Rate, even if the lender delays reducing its standard variable rate to reflect the reduction.

Tracker rates often track the Bank of England Base Rate by a certain percentage, e.g. Bank of England Base plus 0.75% for the full term of the mortgage.

Many tracker products also offer flexible terms.

Pros:

A tracker rate means that you immediately benefit from any reduction in Bank of England Base Rate - which is particularly beneficial in times of low Base Rates.

Cons:

If the Bank of England Base Rate increases, your interest rate will also move up, whilst those on capped or fixed rates keep their lower rates for longer.

An example of a tracker rate (as at February 2005):

Base Rate plus 0.19% for the term of the mortgage.

Other features

As well as having one of the above interest rate features, mortgages could offer a number of other options, which can help you make the decision on what is best for you and your circumstances.

• Flexible mortgages
  

A flexible mortgage allows you to vary your monthly repayments. Depending on the flexibility of the particular mortgage, you can, without charge

• Make over or underpayments each month (e.g. you know you will have high expenses in June, so choose to underpay that month).
• Make a lump sum repayment (e.g. if you receive a bonus and decide to put it all into the mortgage).
• Take a payment 'holiday' (you might want to pay for a car or a holiday and need to take a break from your mortgage payments for a while).
• The flexibility is conditional - usually you have to follow (or exceed) a predetermined repayment schedule.
  

TOP TIP:

Look out for a mortgage which may not officially be "flexible" but still allows the ability to make overpayments.

• Cashback mortgages
  

A cashback mortgage pays out an upfront lump sum when the mortgage is taken out. This sum can then by used to pay, for example, for home furnishings or pay off a credit card debt.

If you do take out a cashback mortgage you will often find that the interest rate is the lender's standard variable rate - the disadvantage of the cashback could be the lack of flexibility or competitiveness on the interest rate.

• Droplock mortgages
  

A droplock mortgage is a discount or tracker mortgage which has an option to switch to a fixed rate at any point within the initial discount or tracker period without paying any early repayment charges.

This provides an ideal way to benefit from base rates when they're low, with the option to switch easily to the protection of a fixed rate should interest rates look set to rise significantly.

• Current account mortgages
  

Current account mortgages combine a mortgage and a current (banking & cheque) account. They're designed to fit into the "modern lifestyle" and can be ideal if you would like the option to make overpayments on your mortgage (e.g. if you are self-employed or receive irregular bonus payments).

The other advantage is that interest is calculated on a daily basis, so when you pay money into your account the overall loan size is lowered, thereby reducing the total amount of interest paid.

It's easiest to think of a current account mortgage as a large overdraft - when you have your salary paid into your account each month the overdraft is reduced and therefore so is the interest. Even when you make withdrawals from your account over the month, because the total overdraft has been reduced, the interest accrued is lower and the time to paying off your mortgage is reduced.

• Offset mortgages
  

Like current account mortgages, offset products allow you to offset the balance of your mortgage against any funds in a savings and/or current account held with the same lender, and pay interest (calculated on a daily basis) on the net balance between the accounts