Bringing home the mortgage

Deciphering estate agents' hype and sweet-talking sellers into leaving the dishwasher are the easy bits of the house-buying process. The real anguish lies in finding the best way to fund the purchase.

The prospect of falling interest rates and house prices is likely to encourage first-time buyers, who will find themselves wooed by banks and building societies. The older and wiser, preparing to move up-market or remortgage, are likely to find themselves similarly courted: to be capped or not to be; whether it is nobler to be fixed, flexible or to demand cash back, to choose repayment or endowment, with-profits, unit-linked or pension-linked.

The guiding principle is to check out the lender's standard variable rate and the repayment terms, and any special deals. 'People tend to look solely at the headline rate, which might look enticing, but you could find the terms compel you to take out less competitive in-house insurance that would inflate the overall cost,' says Rod Murdison, an independent financial adviser with Murdison and Browning, a London-based mortgage broker.

Endowment Mortgages

At one time four out of five buyers opted for this, now it's one in three. With an endowment, the monthly repayments only cover the interest; the capital is paid off by monthly contributions to an investment package that will hopefully grow sufficiently to pay off the mortgage at the end of 25 years. A with-profits endowment pays annual bonuses that are added to the fund and, at the end of the term, a final bonus that can be worth up to 50 per cent of the final amount yielded by the fund. This means that you have to let the mortgage run its full term to realise the full amount.

If you want to control where your money is invested, there is the unit-linked endowment, which allows the borrower to choose the investment area and balance out the risks. If you choose this option, you can increase your monthly endowment payments if you want to pay off your mortgage earlier.

The problem with endowments is that, as with any growth-dependent investment, there is a slight risk that the lump sum at the end will not be large enough to pay off the loan. On the other hand, if the markets rise, policy holders may expect a handy sum left over.

Repayment

There is no potential pot of gold at the end of the term as there is with endowments, but there is the cast-iron guarantee that the mortgage will be paid off. Under this method, if your fortunes improve, you can negotiate a shorter payback time.

Special offers

As lenders compete to cash in on the booming property market, fixed rates as low as 1.59 per cent are on offer. Some of the most attractive rates are offered by small regional lenders and direct (telephone) mortgage companies.

FirstMortgage has instigated a longer-term, fixed-rate loan, which borrowers can repay at 5.75 per cent over any term from five to 15 years. Although the monthly repayments are obviously higher on mortgages of less than 25 years, the savings in the long term can be considerable (eg paying back an ?80,000 mortgage in five rather than 25 years, you can save approximately ?86,000 in interest).

With any special deal, check the lender's variable rate before committing and bear in mind there is often a sizeable arrangement fee. Most fixed-rates, where the repayments are frozen for a number of years at a rate below the variable, and capped rates, which allow repayments to rise and fall within limits, require the borrower to remain with that lender for up to five years after the deal is ended.

Specialist Mortgages

Until recently the newly self-employed and those with bad credit ratings or no cash deposits couldn't get a mortgage. Earlier this year, buyers without a cash deposit could choose from 33 100 per cent loan options; now there are twice that number, some on decent fixed rates, available through lenders such as Royal Bank of Scotland (RBS), Bristol and West and Portman Building Society. However, the rates are usually higher than on more conventional loans and you should expect to pay a mortgage indemnity guarantee premium.

Bristol and West is one of the few big lenders to offer mortgages at 3.5 times the borrower's income, up to 95 per cent of the property price. A few innovative lenders such as Chelsea and Paragon will take on buyers with bad credit ratings - usually at inflated interest rates.

Flexible mortgages that allow borrowers to top up payments to create a surplus, or reduce them if times are hard, are handy for those with an uncertain cash flow.

Getting advice

It pays to find an independent financial adviser to guide you through the mortgage maze. Often they have access to superior deals unavailable to the public.

Many estate agents will flaunt their 'independent' mortgage brokers, but beware; they may be tied to a life assurance company. Moreover, anyone can set up as a mortgage broker, whereas independent financial advisers are regulated. The latter earn commission from endowment insurance and pension deals, so if you take out any of these, they are likely to waive a fee. Fees are usually one per cent.

Alexandra Sampson IFA Promotions (0171 971 1177) keeps a database of independent financial advisers.

Bristol and West: 0117 929 2222; RBS: 0131 556 8555; Portman: 01202 292444; Chelsea: 01242 271271; Paragon: 0800 440099; FirstMortgage: 0800 080088.