Whether you are a first-time buyer or an existing borrower, Mortgage On Line will help you find the most suitable homeloan for your needs.

The first time you go down the road to buying a new home you will probably find that there are many unfamiliar terms that at first seem daunting and complex. To make your journey simple we have mapped out the process of choosing a loan, breaking it down into three easy-to-follow stages.

STAGE 1

There are two main ways to repay a mortgage:

Capital and Interest and Interest Only.

Repayments consist of two elements.

• Capital - which reduces the balance of your mortgage

And

• Interest which is calculated on the reducing balance.

The lender calculates the repayments to ensure that, if they are all made on time, the mortgage will be repaid in full at the end of an agreed period. Repayments are affected by interest rate changes and will decrease in line with those changes. Following a change in the rate applicable to your account you will generally receive a letter advising you of revised payments.

Payments are used to pay interest only and no a contribution is made towards reducing the mortgage amount. Payments are affected by interest rate changes and will decrease or increase in line with those changes. Following a change in the rate applicable to your account you will generally receive a letter advising you of revised payments.

Because the payments are intended to pay interest only, the balance of your mortgage is not reduced and the full amount becomes due at the end of the agreed period of the loan. It is important that suitable arrangements are in place to repay the loan amount outstanding (together with any accrues or unpaid interest) by the end of the agreed period of the loan. You therefore need to contribute to an acceptable Investment or Pension Plan, which will repay the mortgage at the end of this period. Requirement for you to assign any life policies may be made; this may have consequences for you on bankruptcy or death of one party to the loan. You should take advice from your solicitor.

There are many types of Investment or Pension Plans which can be used to repay an interest only mortgage. Each has its benefits and drawbacks.

A with Profit Endowment Assurance Plan or a Full Endowment is a combined investment plan and life assurance. It is intended to repay the mortgage at the end of the agreed period or in the event of your earlier death. With this type of policy, the amount you receive at the end of the period is usually enhanced by annual bonuses so that there is money left over after repaying the mortgage. This surplus would be paid to you (or your dependants in the event of death).

This option can be more costly than other schemes but guarantees full payment of the mortgage and normally offers a better return when the mortgage ends.

Low Cost Endowment Assurance is a popular variant of the With Profit Endowment Plan. The repayment calculations assume a certain future rate of investment returns, which support annual bonuses under which there should be sufficient funds to repay the loan when the mortgage expires. However, the annual bonuses cannot be guaranteed and there may be a higher or lower sum than anticipated. Any surplus would be paid to you, however you would also have to pay any deficit.

NOTE: Generally a 25 year plan has paid out a surplus in 99 out of 100 times when held to full maturity.

The life assurance included in this plan guarantees that your mortgage is repaid in full in the event of your death before the mortgage ends.

The Low Cost Endowment Assurance is often the cheapest option but you may require to pay a lump sum at the end of the mortgage period.

With a Unit Linked Endowment Assurance Plan, the payments are used to buy ‘units’ in a range of funds, which can be chosen by you and administered by fund managers. These funds are used to buy a range of investments such as fixed interest rate deposits, property, or shares in companies quoted on Stock Exchanges throughout the world. The spread of the investments offers some stability against volatile market conditions. The wide choice of funds available allows you to strike the appropriate balance between security and growth potential to match your own circumstances and personal objectives.

The payments are designed to create a fund sufficient to repay the mortgage amount at the end of the period but this cannot be guaranteed as the value of investments can fall as well as rise. You may be liable to pay a lump sum at the end of the mortgage period.

The life assurance included in this plan guarantees that your mortgage is repaid in full in the event of your death before the mortgage ends. You are generally not tied to a fixed term.

Pension Plan Policies have traditionally been used to provide a retirement income but the lump sum can also be used to repay a mortgage. Contributions are currently treated as an allowable expense for Income Tax purposes and the funds do not attract tax on the investment returns achieved. The value of these reliefs depends upon your personal financial circumstances. Tax concessions have made this option a popular choice for those who are not in company pension schemes.

However, there is no guarantee that the lump sum will be sufficient to repay the mortgage on its expiry as the proceeds depend upon the investment returns achieved which may be greater or less than the assumptions for growth made at the outset. As most pension policies do not incorporate life cover, separate life assurance will be required to ensure that the mortgage is repaid fully in the event of your death.

MORTGAGES are usually taken over a 25-year period of term, but you can choose to pay your loan back after, say, 10 or 30 years.

With a repayment type of loan, a longer term will reduce your monthly payments, while a shorter payback period will increase your monthly costs.

With an interest-only loan, the length of the mortgage term makes no difference to payments to your lender, since the debt remains the same you just pay interest each month. However, if you are relying on the proceeds from an investment policy, you will have to pay more into your policy each month if the loan is to be paid back over a shorter period.

It may be possible to arrange a mortgage tat is part repayment and part, say, endowment. This means that some of your mortgage is guaranteed to be repaid, come what may, while the rest is repaid by an investment vehicle that may provide a surplus lump sum.

STAGE 2

Now you have seen the different methods of repaying a loan, it is time to look at how interest is charged. Once again, you have two basic choices. In this case, variable rate or fixed rate.

As the name suggests, during the course of the loan the interest rate can go up or down. There may be spells of several months when the interest rate remains constant, or the rate can change many times over a course of months.

The interest rate charged by the mortgage lender is largely determined by the bank base rate, so when the Bank of England announces a base rate change, variable mortgage rates usually follow the movement (up or down).

Often, many of the lenders charge the same or very similar standard mortgage rates, but be wary of any lender that has a standard variable rate that is considerably higher than the rest.

Lenders often offer incentives to borrowers to encourage them to take a variable rate mortgage.

1. Discounts

• Usually, these are for the first few months or years after the loan has been taken. You must remember that when the discount period ends monthly payments will increase. If you have had a large discount, you will get a bigger payment shock when you revert to paying the standard variable rate.
• Discounts are often available for the following categories of borrower:

• First-time buyers
• New borrowers (who already have a mortgage from another lender).
• Existing borrowers coming back for a new loan

• In addition, lenders may offer bigger discounts to borrowers who are putting a larger deposit towards the purchase.
• They may also provide a discount to borrowers taking larger loans.

2. Cash-backs

Lenders may pay a sum of money back to the borrower on completion of the loan - this can, in some instances, amount to several thousands of pounds.

3. Subsidies for fees

Lenders may offer a sum of money towards the cost of legal fees or survey charges.

4. Mixture

Lenders sometimes offer a combination of the incentives listed above.

B: FIXED RATE

Increasingly popular, the fixed rate mortgage provides guaranteed mortgage payments for a pre-determined period. Since you are protected against rising interest rates, you can budget with confidence.

Fixed rates are available for periods of between six months to 25 years, with two to five years being the most popular.

Often the lender will charge an up front commitment or application fee to reserve the mortgage (this is non-refundable). The lender may also charge an arrangement or completion fee once the loan is taken. Fees are likely to range between £150 and £450.

Some lenders will offer a lower fixed rate to first time buyers or those taking a larger loan. Or they may help towards legal and valuation fees.

There is, of course, the possibility that variable rates will fall below the fixed rate and you may be wary of being locked into a loan paying a higher rate. However, you should always remember that you are fully protected against rising mortgage interest rates.

There is a type of homeloan that offers a combination of fixed and variable rates:

The loan has a maximum rate over which you will not be charged for a pre-determined period. However, if the lender’s variable rate falls below the capped rate your rate tracks this down.

Since the capped rate offers this dual benefit, a lender will usually set a higher rate for a capped mortgage over, say, three years, than it will charge on a fixed rate of the same period.

You have a choice of how your interest is charged: variable rate or fixed rate.

VARIABLE RATES: allow you to enjoy reduced payments when interest rates fall, but increased payments when they rise.

The variable rate loan is often available with an initial discount for a period of months or years.

The lender may also provide a cash-back payment, or help with legal and valuation fees.

FIXED RATES: provide certainty of payments for a period. This makes it ideal for budgeting purposes and provides valuable protection against rising interest rates.

Remember that special deals may be available on variable and fixed rate mortgages for first time buyers, new borrowers or customers going back to their existing lender for a new loan.

Since variable rates go up and down, many lenders offer budget or annualised schemes, where your rate is set once a year and payments remain constant for the next 12 months. At the end of the year, the lender then works our how much you have over - or underpaid during the previous 12 months (which depends on how variable interest rates changed).

If the lender offers a fixed rate or a discounted variable rate mortgage, it may charge a stiff penalty if you decide to cash in your loan before the fixed rate or discounted rate period has run out. This penalty usually amounts to three or six months’ gross interest.

Watch out as some lenders charge a redemption penalty even after the fixed rate or discounted rate period has run out.

Some mortgages are only available if you take one or a combination of insurance products through the lender - these could be an endowment or term assurance, buildings, contents, combined buildings and contents, insurance against redundancy, or a combination.

Some types of mortgage that were popular in the 1980s are no longer widely available.

Mortgages were taken in a foreign currency which offered a lower rate of interest than was available in the U K. However, volatile exchange rates mean this type of loan is for the financially sophisticated borrower who understands the market and is prepared to lose money.

Payments were made at a low interest rate, but the borrower was charged the full rate. The difference between the amount paid and the sum charged was added to the loan.

STAGE 3

Now you have looked at the types of mortgage available and how interest is charged, let’s see where you can go for your homeloan.

The traditional source of mortgages, there are around 80 building societies of varying sizes - some with hundreds of High Street outlets and other local societies with just one or a handful of branches.

Mortgages are, of course, the bread and butter business of the building societies and they have, in many cases, more than 100 years’ experience of lending homeloans.

The High Street banks have been providing homeloans for a number of years and are taking an increasing share of the mortgage market. The main banks have even more branches that the big building societies.

While most banks are wary of lending high loan to value mortgages, it is worth remembering that The Royal Bank of Scotland is one of a handful of lenders actively offering 100 per cent homeloans. The banks are particularly focused on fixed rate mortgages.

These are often referred to as centralised lenders, since they have no High Street branch outlets. Originally, they offered their products to the homebuyers like through Mortgage Direct, but today many of these companies will lend direct to homebuyers over the telephone.

Many insurance companies offer their own mortgages (as well as loans from banks, building societies and specialist lenders), either through brokers or sometimes direct to the public.

You may go direct to a lender for your loan - however, you may want to approach an adviser who is able to provide access to a number of lenders, and these include:

BROKERS

Independent Financial Advisers (IFAs) can and must provide advice on Investment products (endowment and pensions) from across the whole market. They also provide mortgages from a wide range of banks, building societies and other specialist lenders.

Tied agents offer investment advice on products from a single life company but can source mortgages from across the market.

INSURANCE COMPANY APPOINTED REPS

These are employees or representatives of a single life company and they may have access to a panel of mortgage lenders. They can only provide advice and arrange the investment products (endowments and pensions) of a single life company that they work for or to which they are tied.

ESTATE AGENTS

Often provide a mortgage service. They may have access to a number of lenders but are generally tied or independent.

SOLICITORS

May offer mortgage advice, In Scotland they are much more involved in the mortgage market.

With around 100 mortgage lenders, you are spoilt for choice. If you are looking for a loan from a traditional lender with many years’ experience, then a building society is a good option.

Most borrowers are attracted to the largest societies but it is worth noting that some of the lowest rates and best deals are available from the smaller, local societies.

If you go to a large, national society you may not get the very best deal, but neither are you likely to get the worst.

The High Street banks are increasingly taking a larger share of the mortgage market, and score highly on convenience, since they have many more branches that the building societies. The specialist lenders often provide eye-catching interest rates, and if you are self-employed they may be the only option.

To save time and money, and to get an overview of the mortgage market as well as access to a wide range of lenders and homeloans, you can approach Mortgage On Line or an Independent Financial intermediary.

There are a number of homes and mortgage-related Insurance’s:

1. Life assurance

Pays off your mortgage in the event of death so a must if you have dependants. Endowments have built-in life cover.

2. Building insurance

All lenders will insist you have this in place.

3. Contents insurance

Advisable to insure all your possessions against theft or damage.

4. Buildings & Contents

Combined cover in one policy.

5. ASU

Accident, sickness and unemployment insurance. Pays an income if you are unable to work for an extended period. Changes in October 1995 to income support for unemployed borrower makes this insurance highly advisable. (Some policies provide cover against just unemployment or redundancy).

ANNUAL PERCENTAGE RATE - meant to show the true cost of a homeloan.

COUNTY COURT JUDGEMENT - many lenders won’t advance a mortgage if you have any outstanding judgements against you.

LOAN TO VALUE - the size of the loan expressed as the percentage of the purchase price or valuation. The LTV of a £60,000 loan on a £80,000 home would be 75 per cent.

MORTGAGE INDEMNITY GUARANTEE - an insurance that borrowers have to pay when they take high LTV mortgages. Some lenders start levying a MIG on 70per cent loans, while others kick in at 75 per cent or 90 per cent. The MIG protects the lender, but the borrower pays the bill.

At Mortgage On Line we are committed to giving full information on our products. We also subscribe to the Council of Mortgage Lenders Code of Mortgage Lending Practice, July 1997; copies of the code are available on request. As your Mortgage Adviser / Consultant we will have provided information on the mortgage product which he has * advised you to take or which you have already decided to take. This together with other mortgage information should allow you to make an informed choice to suit your mortgage needs.

A mortgage is an arrangement whereby you lend money so that you can purchase a house/flat. The lender uses the house/flat as security for its loan. You can choose from a number of methods of repaying the loan and meeting the interest payments. This allows you to select the best mortgage for your financial circumstances and personal wishes.

A mortgage is a long terms financial commitment with repayments generally over 25 years or so. However, in practice people often sell their house before the end of the mortgage period to move home. The original loan is then repaid from the sale of the first house and a new mortgage is taken out to buy the new home. Each joint borrower is individually liable for the amount of the loan and interest due to the Bank and may have to pay the full amount outstanding. Events such as separation, divorce, unemployment, long term sickness, injury or disability could also cause a house to be sold and that mortgage to be terminated.

The early repayment of a loan can have different financial consequences depending on the type of mortgage taken.

We consider it best advise for you to have a suitable life assurance policy so that the loan is repaid in the event of your death. This ensures that, in these distressing circumstances, your house will not have to be sold to repay the mortgage. We will review any of your existing life assurance policies to check whether they are suitable. Some lenders do not insist on this but may impose different terms.

Variable Rate: This rate is set by a lender for Residential Mortgages and varies in line with market conditions. Repayments may therefore fluctuate. Any fall in this rate, results in lower repayments, but an increase means a higher outlay.

Discounted Rate mortgages may occasionally be offered. We reduce the interest rate applicable to your loan by a specific percentage for an agreed period. Repayments will always be less during this period. During the course of the agreed discount period the rate of interest applicable to your loan will fluctuate in line with changes to the variable interest rate. At the end of the agreed discount period, the mortgage continues with a variable interest rate.

With Fixed Rate mortgages, the interest rate is set for an agreed period. This can be for 1 to 10 years or more and at the end of that agreed period, the mortgage continues with a variable interest rate.

Fixed Rate mortgages offer peace of mind, since you are protected against rising interest rates and have the comfort of knowing exactly what your repayments will be during the initial fixed rate period. However if the variable rate should fall, you continue to pay interest at the fixed rate.

Fixed Rate mortgages are generally ‘portable’ which means that, if you move house during the fixed rate period, you can transfer the fixed rate portion of your loan to the new property at the same interest rate for the remainder of the fixed rate period.

Capped Rate mortgages are offered by lenders for Residential Mortgages. These are arranged on the basis that, for an agreed period, your interest rate will not rise above a pre-set level. However, your repayments will fall in line with any reductions in our variable rate. Capped Rate loans offer the best of both worlds during the agreed period, the only outlay can not rise above a known amount (however high the general interest rate) and yet it will reduce in line with variable rate reductions. At the end of the agreed capped rate period, your mortgage continues with a variable interest rate.

Generally Capped Rate mortgages are ‘portable’ which means that, if you move house during the capped rate period, you can transfer the capped rate portion of your loan to the new property at the same interest rate for the remainder of the capped rate period.

London Inter-Bank Offered Rate (LIBOR): From time to time lenders offer products which are linked to the published money market rate known as LIBOR. Interest rates under a facility of this nature are normally fixed for periods of three months at a time.

LIBOR rate is generally lower than the variable rate and there is protection against rising interest rates through the three-month period. In addition there is the added comfort of knowing exactly what your payments will be during the quarter. However should rates fall during the quarter, interest will continue to be paid at the fixed rate.

Annual Percentage Rate of Interest (APR): the APR is calculated from the total amount of interest which will be paid on a loan and adds to this any other charges which the borrower has to meet. This total cost is then divided by the number of years in the loan term to find out what the borrower will be paying per year. This amount is then expressed as a percentage of the loan - the annual percentage rate.

These are applied to cover costs incurred by the lender in setting up your mortgage.

A Booking Fee is payable when you ask a lender to provide you with a Fixed Rate or Capped Rate or 100% Mortgage. Loan monies require to be allocated for each application received and the fee covers the cost of reserving funds.

Booking fees are generally required to be paid when a request for loan facilities is submitted, and, can be non-refundable should the application not proceed for any reason. The booking fee covers the costs of reserving your loan.

An Arrangement Fee is a one-off payment to cover a lender’s costs in preparing documentation and communicating with your Employer, Solicitor, Estate Agent or Mortgage Broker.

The fee is payable prior to the release of the loan monies and can be added to it. If your application does not proceed for any reason the arrangement fee will generally be refunded.

Higher Loan to Value Access Fee. This is a fee, which is charged for what may be called ‘high risk loans’. The fee allows us to lend amounts greater than, in most cases, 90% of what your property is worth. Where a fee is payable, it is charged on all borrowing from 75%. It is a one-off payment, which may be added to your loan.

The fee is necessary to cover the increased risks associated with higher loan to value mortgages and is arranged solely for the benefit of the Bank or Building Society. If there is a forced sale of the property, the proceeds are unlikely to cover the outstanding loan and administration costs. In the event of default by the borrower and if a claim has to be made by the Bank or Building Society. Insurers have the right to take legal action against the borrower(s) to recover any monies paid.

Early Redemption Fees can be incurred if your mortgage is repaid or changed before the end of the agreed period. The fees are to cover the lender cost of releasing the security over the property and to cover the consequential interest rate risk to the lender, which occurs in such circumstances. However, no fees are due if you are moving house and you take out a mortgage for your new home with us. Certain products carry a pro-rata charge for partial redemption, e.g. Fixed Rate Products.

A Standard Redemption Fee is charged if you elect to repay your loan prior to the end of the agreed term. In the event of an early repayment fee being applied the standard redemption fee will be waived.

It should be noted that different mortgage products carry different redemption fees.

There are a number of other costs associated with buying a house. You need to take these into account when deciding how much you can afford to borrow.

Valuation Fee: An acceptable mortgage valuation report is required before any mortgage can be agreed. Using a panel of qualified Surveyors and the valuation will be arranged. You are responsible for paying the fees for this work.

The Mortgage Valuation Report is not a survey but identifies obvious defects. You may wish to pay for a more detailed ‘House or Flat Buyers Report and Valuation’ which reports on the general condition of the property. For very old or unusual properties, you may wish to consider a more comprehensive Structural Survey. On occasions we may need a more detailed survey than is provided by the Mortgage Valuation Report, the cost of which will require to be met by you.

Legal Fees can be a major cost in the purchase of a house. The legal work, which transfers the ownership of a property, is called conveyancing and a Solicitor usually completes this. Costs will vary but most Solicitors charge according to the purchase price of the property. You should always ask a solicitor for a quotation prior to instructing them to do the work.

You will also incur Legal fees in the preparation of documentation, which provides the lender with security over the property (called a Standard Security in Scotland and a Legal Charge in England) and any other security requested. To minimise the cost, the lender will endeavour to use the same solicitor for this security documentation as you have engaged for the conveyancing.

Stamp duty is a Government tax which is currently charged at 1% of the value of the property from £60,001 to £250,000, 3% from £250,001 to £500,000 and 4% above £500,000. This charge will be handled by your solicitor and will be included in the invoice for legal fees.

Buildings and Contents Insurance must be considered carefully. Most lenders require you to ensure that a Buildings Insurance Policy is in place prior to the release of your loan funds. We strongly recommend that you take out Contents Insurance as well since the value of your house contents is likely to be several thousand pounds. A good insurance policy will provide cover against burglary, fire, flood and domestic accidents. Like any insurance policy there are certain exclusions. Although not compulsory our competitive quotes to cover both buildings and contents.

Mortgage payment Protection is recommended to protect you against the loss of income due to unemployment, sickness or accidental injury. You need to ensure that you can always meet your mortgage and insurance payments. Insurance is designed to give you security and peace of mind and an explanatory brochure is available from the above address if you wish to take out insurance.

Special Status: Before taking out any mortgage you must carefully consider your financial position and satisfy yourself that you will be able to afford the payments. This is particularly important if you are applying on a Special Status basis where you have chosen not to inform us of your income and we will not therefore be taking this into account in deciding whether to provide you with the mortgage requested.

Searching for your ideal mortgage can be a confusing business as you suffer from information overload. To help, we have selected ten key questions that you should ask your lender or adviser before you decide on your mortgage.

There are a huge variety of mortgages on offer. Ensure that the adviser explains fully the differences between the mortgage deals they have. Many lenders, for example, offer fixed rates, discounts and cashbacks across a number of different terms. You should also be given an explanation of the different ways of paying the capital off - repayment (or capital and interest) or interest only (which are designed to be repaid using the proceeds from an endowment, pension or ISA).

If you are taking a discount product or a fixed rate then the adviser should inform you as to the rate you will be paying during the product period and how long you will receive that rate for.

You should be told whether you will be switched on to the standard variable rate or whether the lender will offer you another product.

Many borrowers are now thinking of their mortgages in the long term as well as in terms of the upfront rate. It is important therefore to know what existing customers with the lender are paying at the end of their fixed/discounted period. Of course it is very unlikely that you will be paying the same standard variable rate when your product comes to an end but it may be useful to look at how the lender currently compares against the market.

The adviser should tell you exactly what your monthly payments would be at the rate quoted. In addition, make sure the adviser shows you how much you would be paying at the standard variable rate to give you an idea of what you will be paying after your product term comes to an end. However mortgage rates are currently comparatively low, so ask the adviser to work out the payments on interest rates of up to 10 per cent as well. This is essential, as it will show you whether you will be able to afford your mortgage if interest rates rise substantially.

6. If you wish to make over/underpayments with interest calculated daily then consider an Australian style mortgage (flexible mortgage).

7. What if any, are the early redemption fee charges attached to the deal?

Many mortgage deals involve some kind of redemption fee, i.e., you will have to pay a fee if you repay your mortgage early or move to another lender within a set period. You should find out exactly what you will have to pay and what would happen if you moved home during your product term.

8. Is there any arrangement fees payable on the mortgage deal I am interested in?

The adviser should tell you about every payment you will have to make an arrange your mortgage deal. This will then give you an idea of the whole cost of the deal rather than just the upfront rate. Check to see if your lender offers a choice of products where one set has no arrangement fees.

9. Are there any other conditions on the mortgage deal I have in mind?

Many lenders offer better discounts; fixed rates or cashbacks if you are prepared to take the lender’s building and contents insurance. As these are most probably something you will have to arrange anyway it is worth considering. Make sure you know the terms of the deal and what would happen if you moved your insurance cover in the future.

10. Do I have to make extra payments if I am borrowing a certain amount of the property’s value?

Most lenders charge you extra if you are borrowing more than a certain amount of the value of the property. Make sure that you know what the extra payments will be, why they are charged and how you will have to pay the fee. Some lenders charge it upfront; some add it to the loan and Nationwide charges it over the first three years of the mortgage to prevent it being such a burden