Home loans made to fit

Housing has always been a lifestyle choice - provided there is enough cash around. But now the loan to finance choice is also a lifestyle affair. This DIY guide to mortgages looks into three specific areas where home-loan decisions are far from the plain vanilla.

Loans for those starting out as home buyers: Despite affordability problems, Alliance & Leicester's new "moving/improving" index suggests that buyers in their 20s have not been put off purchasing. This puts the spotlight on the availability of 100% - and more - mortgages. These enable younger people with minimal savings to get onto the housing ladder. But - and mortgage companies rarely underline this - these ultra-high loans also increase the risk of future negative equity and repossession misery.

Loans for those who fail to fit standard criteria: These cost more, although many high street lenders are now willing to stretch formerly rigid rules a little - realising that today's lifestyles of contract working and self-employment are far removed from the job-for-life concept.

The specialist lender igroup says: "Automated credit-scoring techniques applied by high street lenders do not necessarily accommodate today's changing lifestyle needs. Many do not take into consideration a borrower's individual circumstances. You need to look at the intent and ability to repay the loan."

The pros and cons of "buy-to-let": A popular investment in which consumers have little protection other than their common sense. Buy-to-let loans count as business mortgages, so borrowers are left outside consumer codes.

Ken Lowes, an independent financial adviser, warns that it could be "buy to regret. An investment is only as good as the money of the person you will sell it on to".

But while the majority of mortgages and remortgages still go to those with steady incomes and a 20% to 25% deposit, lifestyle again plays a big part in choice.

A first decision is between flexibility and rigidity. No one sells a home loan claiming "rigidity" as a feature. But most mortgages fall into this category. Providing borrowers do not default on payments, rigidity offers:

· Payment certainty

· Security that the loan will be repaid in full

· Discounts and other special deals.

But offers of flexible mortgages assail home buyers from all sides.These include current-account mortgages where your salary, credit card, car loan and home loan could all be in one package.

The attraction is that you could pay off your mortgage earlier and pay far less than a conventional mortgage. Your salary cheque helps offset the loan each month - at least until you spend it.

Other flexible mortgages make the same claim: save years and thousands. These offer facilities such as payment holidays, drawdown of cash against your home's growing value, borrowing back previous overpayments and daily interest sums.

If your lifestyle is one in which you will have the ability to make big payments in some months and perhaps pay in a minimum amount in others, the flexibility could be a good idea. Banks, however, are not in business to save you money. So before you plunge into a flexible mortgage, think carefully.

Here are some drawbacks they rarely feature.

· Interest rates on flexible loans are often higher. If you are not going to use the facilities, look for a deep discount deal.

· Daily interest is only an advantage over annual calculations if you make several small overpayments and if the interest rate is no higher.

· You need self-discipline otherwise your loan could grow rather than shrink.

· You may have to re-arrange spending patterns to suit the loan's conditions.