MORTGAGES

A mortgage is a method of using property as security for the payment of a debt.

The term mortgage (from Law French, lit. dead pledge) refers to the legal device used in securing the property, but it is also commonly used to refer to the debt secured by the mortgage.

In most jurisdictions mortgages are strongly associated with loans secured on real estate rather than other property (such as ships) and in some cases only land may be mortgaged. Arranging a mortgage is seen as the standard method by which individuals or businesses can purchase residential or commercial real estate without the need to pay the full value immediately.

In many countries it is normal for home purchase to be funded by a mortgage. In countries where the demand for home ownership is highest, strong domestic markets have developed, notably in Great Britain, Spain and the United States.

CHERRY MORTGAGES LIMITED

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For personal and independent advice on your mortgage or re-mortgage, equity release, or other secured loans contact Cherry Mortgages, Sussex, England. (sorry not outside the UK)

E-mail: Cherry Mortgages

Participants and variant terminology

Each legal system tends to share certain concepts but vary in the terminology and jargon they use.

In general terms the main participants in a mortgage are:

Creditor

The creditor has legal rights to the debt secured by the mortgage and often make a loan to the debtor of the purchase money for the property. Typically, creditors are banks, insurers or other financial institutions who make loans available for the purpose of real estate purchase.

A creditor is sometimes referred to as the mortgagee or lender.

Debtor

The debtor or debtors must meet the requirements of the mortgage conditions (and often the loan conditions) imposed by the creditor in order to avoid the creditor enacting provisions of the mortgage to recover the debt. Typically the debtors will be the individual home-owners, landlords or businesses who are purchasing their property by way of a loan.

A debtor is sometimes referred to as the mortgagor, borrower, or obligor

Other participants

Due to the complicated legal exchange, or conveyance, of the property, one or both of the main participants are likely to require legal representation. The terminology varies with legal jurisdiction; see lawyer, solicitor and conveyancer.

Because of the complex nature of many markets the debtor may approach a mortgage broker or financial adviser to help them source an appropriate creditor typically by finding the most competitive loan.

The debt is sometimes referred to as the hypothecation, which may make use of the services of a hypothecary to assist in the hypothecation.

Legal Aspects

There are essentially two types of legal mortgage.

Mortgage by demise

In a mortgage by demise, the creditor becomes the owner of the mortgaged property until the loan is repaid in full (known as "redemption"). This kind of mortgage takes the form of a conveyance of the property to the creditor, with a condition that the property will be returned on redemption.

This is an older form of legal mortgage and is less common than a mortgage by legal charge. It is no longer available in the UK, by virtue of the Land Registration Act 2002.

Mortgage by legal charge

In a mortgage by legal charge, the debtor remains the legal owner of the property, but the creditor gains sufficient rights over it to enable them to enforce their security, such as a right to take possession of the property or sell it.

To protect the lender, a mortgage by legal charge is usually recorded in a public register. Since mortgage debt is often the largest debt owed by the debtor, banks and other mortgage lenders run title searches of the real property to make certain that there are no mortgages already registered on the debtor's property which might have higher priority. Tax liens, in some cases, will come ahead of mortgages. For this reason, if a borrower has delinquent property taxes, the bank will often pay them to prevent the lienholder from foreclosing and wiping out the mortgage.

This type of mortgage is common in U.S. and, since 1925, it has been the usual form of mortgage in England and Wales (it is now the only form - see above).

In Scotland, the mortgage by legal charge is also known as standard security.

History

At common law, a mortgage was a conveyance of land that on its face was absolute and conveyed a fee simple estate, but which was in fact conditional, and would be of no effect if certain conditions were not met --- usually, but not necessarily, the repayment of a debt to the original landowner. Hence the word "mortgage," Law French for "dead pledge;" that is, it was absolute in form, and unlike a "live gage", was not conditionally dependent on its repayment solely from raising and selling crops or livestock, or of simply giving the fruits of crops and livestock coming from the land that was mortgaged. The mortgage debt remained in effect whether or not the land could successfully produce enough income to repay the debt. In theory, a mortgage required no further steps to be taken by the creditor, such as acceptance of crops and livestock, for repayment.

The difficulty with this arrangement was that the lender was absolute owner of the property and could sell it, or refuse to reconvey it to the borrower, who was in a weak position. Increasingly the courts of equity began to protect the borrower's interests, so that a borrower came to have an absolute right to insist on reconveyance on redemption. This right of the borrower is known as the "equity of redemption".

This arrangement, whereby the mortgagee (the lender) was on theory the absolute owner, but in practice had few of the practical rights of ownership, was seen in many jurisdictions as being awkwardly artificial. By statute the common law position was altered so that the mortgagor would retain ownership, but the mortgagee's rights, such as foreclosure, the power of sale and the right to take possession would be protected.

In the United States, those states that have reformed the nature of mortgages in this way are known as lien states. A similar effect was achieved in England and Wales by the Law of Property Act 1925, which abolished mortgages by the conveyance of a fee simple.

In the United States, mortgages became widely used starting in 1934. In that year, the Federal Housing Administration (FHA) lowered the down payment requirements by offering 80% loan-to-value loans. Next, banks, insurance companies, and other lenders followed the example. The FHA also lengthened loan terms by first introducing 15-year loans to supplant 3, 5, and 7-years loans which ended with a balloon payment. Until the 1930s only 40% of U.S. households owned homes; the rate today is nearly 70%. In 2003, total U.S. residential mortgage production reached a record level of $3.8 trillion through record low interest rates (though these continue to vary according to credit rating.)

Repaying the capital

There are various ways to repay a mortgage loan; repayment depends on locality, tax laws and prevailing culture.

Capital & interest

The most common way to repay a loan is make regular payments of the capital (also called principal) and interest over a set term. This is commonly referred to as (self) amortization in the U.S. and as a repayment mortgage in the UK. Depending on the size of the loan and the prevailing practise in the country the term may be short (10 years) or long (50 years plus). In the UK and U.S., 25 to 30 years is typical. Mortgage repayments, which are typically made monthly, contain a capital element and an interest element. The amount of capital included in each repayment varies throughout the term of the mortgage. In the early years the repayments are largely interest and a small part capital. Towards the end of the mortgage the repayments are mostly capital and a small part interest. In this way the repayment amount determined at outset is calculated to ensure the loan is repaid at a specified period in the future. This gives borrowers assurance that by maintaining repayment the loan will definitely be cleared at a specified date.

Interest only

The main alternative to capital and interest mortgage is an interest only mortgage, where the capital is not repaid throughout the term. This type of mortgage is common in the UK, especially when associated with a regular investment plan. With this arrangement regular contributions are made to a separate investment plan designed to build up a lump sum to repay the mortgage at maturity. This type of arrangement is called an investment-backed mortgage or is often related to the type of plan used: endowment mortgage if an endowment policy is used, similarly a Personal Equity Plan (PEP) mortgage, Individual Savings Account (ISA) mortgage or pension mortgage. Historically, investment-backed mortgages offered various tax advantages over repayment mortgages, although this is no longer the case in the UK. Investment-backed mortgages are seen as higher risk as they are dependent on the investment making sufficient return to clear the debt.

It is not uncommon for interest only mortgages to be arranged without a repayment vehicle, with the borrower gambling that the property market will rise sufficiently for the loan to be repaid by trading down at retirement (or for other less well thought-out reasons.)

No capital or interest

For older borrowers (typically in retirement), it is possible to arrange a mortgage where neither the capital nor interest is repaid. The interest is rolled up with the capital, increasing the debt each year.

These arrangements are variously called reverse mortgages, lifetime mortgages or equity release mortgages, depending on the country. The loans are typically not repaid until the borrowers die, hence the age restriction. For further details, see equity release.

Interest and partial capital

In the U.S. a partial amortization or balloon loan is one where the amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding capital balance is due at some point short of that term. In the UK, a part repayment mortgage is quite common, especially where the original mortgage was investment-backed and on moving house further borrowing is arranged on a capital and interest (repayment) basis.

Option Arm

An option arm allows you the option to pay as little as a 1% interest rate. The catch is, the difference between your payment and the interest on your loan that month becomes negative am. The option arm gives you four payment choices each month (1%, interest only, 30 year fixed rate, 15 year fixed rate). The interest rate will adjust every month, depending on which index the loan is tied to. These loans are great for people who have a lot of equity in their home and don't want to pay higher monthly costs. They are also great for an investor, allowing them the flexibility to choose which payment to make every month.

Mortgages in the United States

Mortgage loan types

There are many types of mortgage loans. The two basic types of amortized loans are the fixed rate mortgage (FRM) and adjustable rate mortgage (ARM).

In a FRM, the interest rate, and hence monthly payment, remains fixed for the life (or term) of the loan. In the U.S., the term is usually for 10, 15, 20, or 30 years. The only increase a consumer might see in their monthly payments would result from an increase in their property taxes or insurance rates (paid using an escrow account, if they've opted to use an escrow). But payments for principal and interest will be consistent throughout the life of the loan using an FRM.

In an ARM, the interest rate is fixed for a period of time, after which it will periodically (annually or monthly) adjust up or down to some market index. Common indices in the U.S. include the Prime Rate, the London Interbank Offered Rate (LIBOR), and the Treasury Index ("T-Bill"). Other indexes like 11th District Cost of Funds Index, COSI, and MTA, are also available but are less popular.

Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where unpredictable interest rates make fixed rate loans difficult to obtain. Since the risk is transferred, lenders will usually make the initial interest rate of the ARM's note anywhere from 0.5% to 2% lower than the average 30-year fixed rate.

In most scenarios, the savings from an ARM outweigh its risks, making them an attractive option for people who are planning to keep a mortgage for ten years or less.

Additionally, lenders rely on credit reports and credit scores derived from them. The higher the score, the more creditworthy the borrower is assumed to be. Favorable interest rates are offered to buyers with high scores. Lower scores indicate higher risk to the lender, and lenders require higher interest rates in such scenarios to compensate for increased risk.

A partial amortization or balloon loan is one where the amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding principal balance is due at some point short of that term. This payment is sometimes referred to as a "balloon payment". A balloon loan can be either a Fixed or Adjustable in terms of the Interest Rate. Many Second Trust mortgages use this feature. The most common way of describing a balloon loan uses the terminology X due in Y, where X is the number of years over which the loan is amortized, and Y is the year in which the principal balance is due. A contract could be written up so there would be more than one "balloon payment" required to be paid during the life of the loan.

Other loan types:

assumed mortgage
blanket loan
bridge loan
budget loan
Commercial Loan
deed of trust
equity loan
hard money loan
package loan
participation mortgage
piggyback loan
reverse mortgage
repayment mortgage
seasoned mortgage
term loan or interest-only loan
wraparound mortgage
Negative amortization loan

United States mortgage process

In the U.S., the process by which a mortgage is secured by a borrower is called origination. This involves the borrower submitting an application and documentation related to his/her financial history to the underwriter. Many banks now offer "no-doc" or "low-doc" loans in which the borrower is required to submit only minimal financial information. These loans carry a slightly higher interest rate (perhaps 0.25% to 0.50% higher) and are available only to borrowers with excellent credit.

Sometimes, a third party is involved, such as a mortgage broker. This entity takes the borrower's information and reviews a number of lenders, selecting the ones that will best meet the needs of the consumer.

Loans are often sold on the open market to larger investors by the originating mortgage company. Many of the guidelines that they follow are suited to satisfy investors. Some companies, called correspondent lenders, sell all or most of their closed loans to these investors, accepting some risks for issuing them. They often offer niche loans at higher prices that the investor does not wish to originate.

If the underwriter is not satisfied with the documentation provided by the borrower, additional documentation and conditions may be imposed, called stipulations. The meeting of such conditions can be a daunting experience for the consumer, but it is crucial for the lending institution to ensure the information being submitted is accurate and meets specific guidelines. This is done to give the lender a reasonable guarantee that the borrower can and will repay the loan. If a third party is involved in the loan, it will help the borrower to clear such conditions.

The following documents are typically required for traditional underwriter review. Over the past several years, use of "automated underwriting" statistical models has reduced the amount of documentation required from many borrowers. Such automated underwriting engines include Freddie Mac's "Loan Prospector" and Fannie Mae's "Desktop Underwriter". For borrowers who have excellent credit and very acceptable debt positions, there may be virtually no documentation of income or assets required at all. Many of these documents are also not required for no-doc and low-doc loans.

Credit Report
1003 — Uniform Residential Loan Application
1004 — Uniform Residential Appraisal Report
1005 — Verification Of Employment (VOE)
1006 — Verification Of Deposit (VOD)
1007 — Single Family Comparable Rent Schedule
1008 — Transmittal Summary
Copy of deed of current home
Federal income tax records for last two years
Verification Of Mortgage (VOM) or Verification Of Payment (VOP)
Borrower's Authorization
Purchase Sales Agreement
1084A and 1084B (Self-Employed Income Analysis) and 1088 (Comparative Income Analysis) -- used if borrower is self-employed

Predatory mortgage lending

There is concern in the U.S. that consumers are often victims of predatory mortgage lending [1]. The main concern is that mortgage brokers and lenders, operating legally, are finding loopholes in the law to obtain additional profit.

Costs

Lenders may charge various fees when giving a mortgage to a mortgagor. These include entry fees, exit fees, administration fees and lenders mortgage insurance. There are also settlement fees (closing costs) the settlement company will charge. In addition, if a third party handles the loan, it may charge other fees as well.

The United States mortgage finance industry

Mortgage lending is a major category of the business of finance in the United States. Mortgages are commercial paper and can be conveyed and assigned freely to other holders. In the U.S., Federal government created several programs, or government sponsored entities, to foster mortgage lending, construction and encourage home ownership. These programs include the Government National Mortgage Association (known as Ginnie Mae), the Federal National Mortgage Association (known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (known as Freddie Mac). These programs work by buying a large number of mortgages from banks and issuing (at a slightly lower interest rate) "mortgage-backed bonds" to investors, which are known as Mortgage Backed Securities (MBS).

This allows the banks to quickly relend the money to other borrowers (including in the form of mortgages) and thereby to create more mortgages than the banks could with the amount they have on deposit. This in turn allows the public to use these mortgages to purchase homes, something the government wishes to encourage. The investors, meanwhile, gain low-risk income at a higher interest rate (essentially the mortgage rate, minus the cuts of the bank and GSE) than they could gain from most other bonds.

Securitization is a momentous change in the way that mortgage bond markets function which has grown rapidly in the last 10 years as a result of the wider dissemination of technology in the mortgage lending world. For borrowers with superior credit, government loans and ideal profiles, this securitization keeps rates almost artificially low, since the pools of funds used to create new loans can be refreshed more quickly than in years past, allowing for more rapid outflow of capital from investors to borrowers without as many personal business ties as the past.

Mortgage in the UK

Mortgage types

The UK mortgage market is one of the most innovative and competitive in the world. Unlike other countries there is no intervention in the market by the state or state funded entities and virtually all borrowing is funded by either mutual organisations (building societies and credit unions) or proprietary lenders (typically banks). Since 1982, when the market was substantially deregulated, there has been substantial innovation and diversification of strategies employed by lenders to attract borrowers. This has led to a wide range of mortgage types.

As lenders derive their funds either from the money markets or from deposits, most mortgages revert to a variable rate, either the lenders standard variable rate or a tracker rate, which will tend to be linked to the underlying Bank of England (BoE) repo rate (or sometimes LIBOR). Initially they will tend to offer an incentive deal to attract new borrowers. This may be:

A fixed rate; where the interest rate remains constant for a set period; typically for 2, 3, 4, 5 or 10 years. Longer term fixed rates (over 5 years) whilst available, tend to be more expensive and therefore less popular than shorter term fixed rates.
A discount rate; where there is set margin reduction in the standard variable rate (e.g. a 2% discount) for a set period; typically 1 to 5 years. Sometimes the discount is expressed as a margin over the base rate (e.g. BoE base rate plus 0.5% for 2 years) and sometimes the rate is stepped (e.g. 3% in year 1, 2% in year 2, 1% in year three).
A cashback mortgage where a lump sum is provided (typically) as a percentage of the advance e.g. 5% of the loan.
A capped rate; where similar to a fixed rate, the interest rate cannot rise above the cap but can vary beneath the cap. Sometimes there is a collar associated with this type of rate which imposes a minimum rate. Capped rate are often offered over periods similar to fixed rates, e.g. 2, 3, 4 or 5 years.

To make matters more confusing these rates are often combined: For example, 4.5% 2 year fixed then a 3 year tracker at BOE rate plus 0.89%.

With each incentive the lender may be offering a rate at less than the market cost of the borrowing. Therefore, they typically impose a penalty if the borrower repays the loan; this used to be called a redemption penalty or tie-in, however since the onset of Financial Services Authority regulation they are referred to as an early repayment charge.

Self Cert Mortgage

The high street banks usually use salaries declared on wage slips to work out a borrower's annual income and they usually lend a multiple of the borrower's annual income (usually 3.5).

Self Certification Mortgage better known as "self cert mortgages", are mortgages that are available to self employed people that have a deposit to buy a house but lack the sufficient documentation to prove their income.

Self cert mortgages have two disadvantages. One is that the interest rates are usually higher than they normally are and the second is that they may only finance 75% loan to value of a property (this can go up to 85% or 90% subject to status and individual lenders).

100% Mortgages

Normally when a bank lends a customer money they want to protect their money as much as possible, they do this by asking the borrower to pay a certain percentage of the loan in the form of a deposit.

100% mortgages are mortgages that require no deposit (100% loan to value). These are sometimes offered to first time buyers.

UK mortgage process

UK lenders usually charge a valuation fee, which pays for a chartered surveyor to visit the property and ensure it is worth enough to cover the mortgage amount. This is not a full survey so it may not identify all the defects that a house buyer needs to know about. Also, it does not usually form a contract between the surveyor and the buyer, so the buyer has no right to sue if the survey fails to detect a major problem. For an extra fee, the surveyor can usually carry out a building survey or a (cheaper) "homebuyers survey" at the same time.

Islamic mortgages

The Sharia law of Islam prohibits the payment or receipt of interest, which means that practising Muslims cannot use conventional mortgages. However, real estate is far too expensive for most people to buy outright using cash: Islamic mortgages solve this problem by having the property change hands twice. In one variation, the bank will buy the house outright and then act as a landlord. The homebuyer, in addition to paying rent, will pay a contribution towards the purchase of the property. When the last payment is made, the property changes hands.

An alternative scheme involves the bank reselling the property according to an installment plan, at a price higher than the original price.

In the United Kingdom, HSBC Bank plc was the first major bank to offer Islamic mortgages.

References

Royal Institute of Chartered Surveyors

External links

FSA Consumer page UK regulator mortgage information.
Mortgage Payment Calculator on BBC web site.

A to Z TYPES OF UK MORTGAGE

BASE RATE TRACKER MORTGAGE

These can get very complicated but in theory they're simply a mortgage that tracks the Bank of England base rate at an agreed rate.

So you might have a Base Rate Tracker Mortgage which sets your mortgage at 1% above the base rate for, say, the first two years.

BRIDGING LOANS MADE EASY

What is a Bridging Loan?

This is a loan that is usually taken out to solve a temporary cash shortfall that may arise when buying a property or business, or perhaps paying for a renovation.

A typical example of when you may need a one would be if you want to buy a second property before you've sold your first.

Or you may need one if you're buying property at auction.

As they are more risky for the lender than the usual housebuyer's loan, bridging loans are more expensive and should only be used where you are fairly certain to repay them within about 6 months.

Depending on the lender, a Bridging Loan can be obtained by the self employed or people with bad credit. In other words to those who traditionally have found it more difficult to get loans and mortgages.

How they work

In the case of buying property, a Bridging Loan is normally secured by getting a mortgage on the new property, and taking out a second mortgage on the property being sold.

In this case the loan will depend on a positive valuation of the relevant properties.

Lenders will usually allow Bridging Loans of up to 65% of the value of the properties - less any existing mortgage. But this will depend on the lender so you can shop around for better deals.

You can usually borrow between £25,000 to £500,000 as standard.

Larger loans are possible but may take slightly longer to arrange.

The process of getting a Bridging Loan

Here's how our partners operate (ie the lenders we will connect you to if you apply from here Your application is emailed direct to our partners.

They will respond to you within an hour (on a normal working day ie between 9 am to 5.30 pm Monday to Friday) with an offer in principle.

If you agree to their offer in principle, the lender will arrange for an urgent valuation of the property the loan is to be secured against.

Once they have recieved your payment for this valuation it will take a maximum of 72 hours.

The cost of the valuation will vary but an average would be £200. To speed up payment you would be able to deposit the funds in a High St bank.

Meanwhile you need to get your solicitor or conveyancer to move very quickly on all the usual conveyancing tasks ie the local authority search, checking the deeds of the new property and so on.

(You can read more about this in the conveyancing section where there's also information on a very efficient conveyancing service).

You should expect the entire process to take 7 to 10 days - ie from your first application to the money being paid over to you.

It could be done quicker. It depends on how fast you want to move and if there aren't any significant hiccups.

The Cost

You will normally be charged a set interest rate, which is usually referred to in terms of a percentage per month.

For example; say you borrow £100,000 at 1.5% per month, the loan will cost you £1,500 per month (ie 1.5% of £100,000 for each month).

In theory you want to shop around for the best rate. But in practice most people simply use the lender that can act quickest because time is usually of the essence when a this type of loan is required.

Please note: If you've got a bad credit history you can expect to pay more.

Bridging Loans for Auctions

If you buy a property at auction, either for your own occupation or as an investment you have to complete within 28 days.

You could use a specialist bridging lender, whose main business is to cater for auction purchases.

These lenders are normally "non-status" (ie they make no enquiries of the financial standing of the borrower), and have no minimum periods or redemption penalties.

Where to get a bridging loan

You may be able to obtain one from a normal bank, or alternatively, from a specialist bridging lender.

The latter may well be preferable. Unlike most banks, they're geared to deal very quickly with your request - which is probably fairly urgent.

They can normally come up with the money within a few days of your application. The average would be a week or so - depending on how speedy the conveyancing has been done by your solicitor or conveyancing agent.

However it could all be done in only be a couple of days.

BUY TO LET MORTGAGES

Mortgage providers' traditionally only offered loans for people buying homes. An increasing number are offering loans for a property you want to "buy to let", (ie not to live in as your home, but to rent/let out to tenants).

Getting income from the rent is seen as a good investment by some and is becoming more commonplace.

It's particularly popular for retirement planning because of the growing concerns about the inadequacies of traditional pensions. The old saying "There's nothing more solid than bricks and mortar" is more relevant than ever.

If you're interested in renting to students in a university town or to commuters in suburbia, the Council of Mortgage Lenders has two leaflets 'Buying to Let' and 'Thinking of Buying a Residential Property to Let' You can order them by phone on 020 7440 2255.

The fears over the past couple of years that the market was overheated seem to have been incorrect. However make sure that your buy to let property is in an area which is likely to have a demand.

There is a wealth of information on buying property to let. Just make sure if you're paying for it that it's been written by someone with direct experience in the field.

CASHBACK DEALS

These deals vary but, as the name suggests, you get cash - in addition to the money you're going to be borrowing. You may use it to pay for moving costs and furniture etc.

Cashback deals are perhaps best seen as a sales technique to get you to take out a mortgage with a particular lender.

It's very rarely a genuine gift and is probably used to tie you in to the mortgage lender - who will eventually more than make their money back.

If you need cash it may be an idea to shop around to look for better deals from your bank, credit card etc. (Best not try the local loan shark though).

CAPPED RATE

This is an interest repayment variation.

Capped rate mortgages are supposed to offer the best of both variable and fixed rate deals.

You agree to have a limit - a cap - on the maximum amount of interest you will pay over a particular period of time while allowing it to fall if the variable rate drops.

Good points: You get the best of both worlds. If the variable rate goes higher than your agreed capped rate then you're only paying up to the agreed capped rate.

Whereas if it falls below your capped rate then you pay less as well.

So you benefit from falling interest rates but are protected from rate rises. You know the max you'll be paying.

Bad points: There's only a limited number of these deals on the market and they're not thought to be very competitive because the interest rate you'll be paying is going to be higher than your average fixed or discounted rate mortgage.

You pay to get the best of both worlds.

Also there'll probably be an admin charge by the mortgage lender of £95 to £200 - though this may not be much compared to the amount you might have paid if your mortgage wasn't capped and interest rates went up.

However some mortgage lenders are now offering good deals which may even be cheaper than fixed rates.

COMBINED MORTGAGE and CURRENT ACCOUNT

aka The Offset Mortgage

This is a relatively new type of product which goes further than the usual flexible mortgage.

Your mortgage account effectively becomes your bank account. You get a chequebook, direct debit facility, credit & cash card and regular statements etc. Your earnings are paid straight into this "mortgage/bank account".

This means that effectively you pay less interest on your mortgage - because your earnings are being used to "pay back" the loan.

Because the interest is calculated daily any changes in your balance, no matter how short the period, will change your interest payments.

You also avoid paying the tax, which you would have been liable for if you were putting your earnings into an interest /bank account because, technically, you are not earning interest.

You are unlikely to be charged for arranging the mortgage, or for any redemption penalties or compulsory insurance.

There is a definite financial advantage to this idea, in theory saving you thousands over the mortgage term.

The general criticism of Combined Mortgage and current accounts is that they don't give you a natural "speedlimit" to your spending (i.e. you never seem to run out of money).

Most of us aren't great money managers. And the problem is if you mess up with this type of account you really mess up big time.

It's perhaps too easy to borrow too much from the account - for a holiday etc. - and before you know it your debt could have doubled.

Are you disciplined enough to be able to look carefully at what's happening with your account and to keep up regular repayments. You could easily be lulled into a false sense of security and overspend bit by bit till your debt is so big you've had it.

If you're interested in this type of mortgage, there are now various ones on offer. The best way to find one is to get a mortgage adviser to help you.

DISCOUNTED VARIABLE RATES

This is an interest repayment variation. To tempt new customers most lenders will offer a new borrower a discount on their standard variable rate, for a set period.

Your payments will go up and down, as with a standard variable mortgage, but you're paying less.

After the agreed set period the interest rate will switch into the mortgage lender's usual variable rate.

So it may be worth checking what their track record has been for their variable rate charge because, if they're pricier than most, they're unlikely to have changed and you may end up as one of the mugs paying over the odds.

The rate for new borrowers is usually lower than for existing customers. So try to shake off that customer inertia and change mortgage lenders every couple of years - having checked, of course, that there's no penalty for leaving.

The penalties for changing to another mortgage lender may last longer than the agreed discount term. But they're usually less than for a fixed rate period.

Good points: You're paying less.

Bad points: You're locked in for the agreed term so if the interest base rate goes up you're stuck. However when the period ends, you can swan along to the next best discount rate.

The shorter the term the better. You probably don't want to tie yourself down for longer than 2 years.

EQUITY RELEASE MORTGAGES

Already a Homeowner? Want to Release Some Equity?

If you are already a homeowner - with or without a mortgage - then you might want to release some equity from your home to give you a cash lump sum.

This means that if you have paid off a significant amount of your mortgage and/or property prices have risen, you can benefit from some of the "profit" that is locked into your house without having to sell your home.

Lenders provide a variety of packages for doing this, but they are generally described as "equity release" mortgages.

Typically you will be able to borrow up to 95% of the equity in your home, given to you in a lump sum which you then pay back like a normal mortgage. This can be used to pay for home improvements, lifestyle changes, home repairs – almost anything, really.

WARNING Be very careful when doing an equity release mortgage. For some reason they are not regulated by the Government. Many experts are worried about this new trend and there are concerns it could become yet another personal finance scandal.

Watch out for the following

Make sure that your proposed equity release plan has a negative equity guarantee. This means that should the value of your property decrease then the debt will also decrease proportionally.
Make sure that you can keep full ownership of your home until your death.
Make sure that you are allowed to move home after taking out an equity release plan.
If you are living “in sin” with a partner, Make sure that you take out a joint plan that makes the debt reclaimable only after the death of the last surviving partner.
Make sure that any outstanding debt after the sale of your property will not be passed on to your relatives.
Watch out for the extra charges involved, like legal fees, the property survey and setting up fees or other admin charges

ENDOWMENT MORTGAGES

These are basically a mix of savings, investments and life assurance "wrapped up" into an insurance policy. Got that?

Well don't waste too much time trying to. They were very popular in the 80s and 90s but, they've resulted in a lot of trouble because the "side" or "by product" investments have done worse than expected and people are looking at a "shortfall" in paying back the mortgage lender.

(In other words the property will not be theirs because they won't have paid off the loan).

It looks as if millions will be badly affected. Accordingly we don't feel it's appropriate to tempt you by going into details of how they work.

If you want to see if you can claim that you were mis-sold an endowment policy call the Financial Services Authority. (Tel. 0845 606 1234).

Getting rid of your Endowment

If you already have an endowment and want to get rid of it you can "sell" it. This could be to the company that sold it to you originally. However you might make more by selling it on the open market. There are a lot of firms who will do this for you.

We can put you in touch with a reputable one we know who will be able to "trawl" the open market and get you the best price. Further info

MORTGAGES for UK EXPATRIATES WORKING OVERSEAS

If you are working overseas and want to buy a property in the UK you will probably find that many mortgage lenders won't want to know.

The problem is that the mortgage lender needs security on their loans and if you're thousands of miles away they'll be more nervous about this. For example it will be harder to chase you if you start defaulting on the repayments.

If you need this type of mortgage they are possible to get but you really need a specialist mortgage broker to check the market for you and give you some quotes.

If you want to buy a property overseas, some mortgage lenders will have products aimed specifically at you. These will come and go depending on the marketing cycle, so we can't recommend one in particular.

If you want to find one the best thing is to apply to a mortgage broker and ask them to source the latest overseas mortgage packages for UK citizens working overseas.

FIXED RATE MORTGAGES

This type of mortgage is where you and the mortgage lender agree to fix the interest rate owed on your loan for a set period of time.

The period of time is usually between 1 and 5 years but could be longer. (That simply depends on the exact mortgage deal you choose).

After the agreed period, the interest rate owed on your loan usually reverts to the lender's Variable Rate.

Good Points: You know exactly what you'll owe. No surprises.

Bad points: If interest rates drop you may be paying more than you might have done if you'd gone for the Variable Rate. But interest rates might rise... At least you're not gambling with your home.

If you want to leave before the agreed term the early redemption penalty is usually significant. For example you may be charged six months gross interest if you leave a five-year fixed rate agreement.

Some penalties could even go beyond the fixed-rate period. This would be an "overhanging redemption penalty". Always read the small print and ask as many "stupid questions" as you feel like. You must be clear on what everything means.

FLEXIBLE MORTGAGES

The details will vary but basically this type of mortgage allows you to be flexible according to your future circumstances/ needs without having to pay a penalty.

So if you need to pay less due to unemployment or whatever, you can take a "payment holiday".

Or, if you win the lottery, you can pay more than usual - ie saving on interest payments in the long run.

(Traditional mortgages would penalise you for not sticking rigidly to the agreed repayments).

A truly flexible mortgage allows the following without penalty:

You can make over and under payments
You can have payment holidays
You can borrow back on payments already made
They should also calculate interest daily

Quite a few High Street mortgage lenders offer these but some are more flexible than others.

When you're comparing them make sure there isn't a minimum amount you have to pay or a limit to the number of any over/under payments.

Most people simply want a loan which allows them to "over pay" their repayment without penalty. It is this aspect of flexible loans where the greatest savings can be made because the quicker you pay off your loan the less interest you'll have to pay.

(It's been estimated that over paying on a loan with an interest rate of 7.74 per cent by £100 a month over 25 years will save you £41,000 in interest payments).

INTEREST ONLY MORTGAGES

This is an arrangement where you're only paying off the interest on the loan.

Unlike a standard mortgage you are not paying off the capital debt part of the mortgage.

So the mortgage costs you less... which means you can borrow more.

But this idea that you can pay less is only a short term solution because you are supposed to set up a side by side investment because the capital debt part is supposed to have been repaid by the end of the mortgage term by your having made simultaneous monthly payments into a separate investment fund.

The idea is that this fund has hopefully grown enough to pay off the capital and leave you with a surplus.

To do this your mortgage salesperson may offer you an investment "side" or "by product" (i.e. what they'll claim is a suitable type of investment to pay off the capital part of the mortgage).

Before accepting anything always shop around for other deals.You may have heard of the endowment mortgage scandal where tens of thousands of people were left with a shortfall. That was a type of interest mortgage.

In our view you'd be best off consulting an IFA. Make sure that s/he specialises in investments.

The majority of mortgage providers no longer ask for proof of an investment side/by product when confirming your mortgage.

You should be very clear that if the investment is not a success then you could lose your home - probably at the end of the mortgage term ie when you're close to retiring.

THE ISA MORTGAGE

The ISA mortgage is a relatively new type of interest only mortgage. The article below should tell you why it may not be the greatest bet for you.

Out of the frying pan, into an ISA

Patrick Collinson issues a warning on the hidden pitfalls that come with a new range of offers (Guardian)

"The endowment mortgage is dead, long live the ISA. That appears to be the refrain from big lenders such as Abbey National and Halifax, which have recently piled into ISA mortgages. But are ISA mortgages likely to be a better bet than controversy-ridden endowments?"

MORTGAGES IN PRINCIPLE

Getting a mortgage and buying a house are usually very much intertwined.

When you find a house, you'll probably have to move fast to secure it. To prevent being delayed while sorting out a mortgage you could first get a "mortgage in principle".

Having one means you should be able get the actual mortgage quicker when the race to buy your chosen home begins.

A mortgage in principle is a conditional offer made by a mortgage lender that - provided the information you give them is correct - they will "in principle" give you the loan you have discussed with them.

Knowing what you can afford will also help you narrow your search.

It's very useful to have one before you even start looking for a house to give you the edge over any competition.

You can get this offer in writing to show to Estate Agents and sellers who will see you as a serious prospect and not a timewaster who's interested, for example, in looking around peoples' homes for a laugh.

To get a mortgage in principle you have to go through the same motions as an actual mortgage. That is: Consider what type of mortgage do you want and then find a mortgage lender you feel can offer you the best deal.

You should be able to get mortgages in principle offered over the phone. It's only when applying for the actual mortgage that the mortgage lender will want to see the proof of your income etc.

PENSION MORTGAGES

Don't bother with these. When we asked about them our experts suggested we think of the words "barge pole" and "don't touch with".

REPAYMENT MORTGAGES

(aka Capital and Repayment Mortgages)

This is the old fashioned, traditional type of mortgage and remains the only way the property is actually guaranteed to be yours at the end of the mortgage term - provided you have repaid the loan.

Your mortgage debt is divided into capital repayments (ie repayment of the money you borrowed) and interest payments (ie repayment of the interest you're being charged for the loan).

As you pay off your mortgage every month you're paying off a bit of capital and a bit of interest until the full debt is repaid.

You usually pay off mostly interest in the early years and then gradually more of the capital debt. It may seem as if this is costing more but that's because unlike the other types of mortgages you're paying off the capital and not just the interest.

STANDARD VARIABLE INTEREST RATE MORTGAGES

Here's how these type of mortgages work.

The Bank of England sets a base rate. This is the basic interest rate - which is that bit on the news you've probably ignored for years when they get all excited about interest rates going up or down.

The mortgage lender's interest rate is set higher than the base rate - say 1 or 2% above it.

So if the base rate is 5% and your mortgage lender is charging you 2% above the base rate, you'll be paying 7% interest.

Now the Bank of England can change the base rate at any time. So if they raise it by 1.5% overnight the base rate is now 6.5%.

So your mortgage is now 8.5% i.e. still 2% above the base rate.

Your mortgage is variable because it goes up and down ie as the base rate varies

Each of the mortgage lenders have their own variable interest rate. They vary a great deal offering as much difference as 1%. It may not sound much but on a £100,000 loan that's £1000 per year.

Good Points: You might get lucky and see the interest rate drop.

Bad points: Errm. You might be unlucky and see the interest rate rise.

BASE TRACKER MORTGAGE

These can get very complicated but in theory they're simply a mortgage that tracks the Bank of England base rate at an agreed rate.

So you might have a Base Rate Tracker Mortgage which sets your mortgage at 1% above the base rate for, say, the first two years.

100% MORTGAGES

A 100% mortgage is where the mortgage lender lends you the full amount that the property costs. (So if the house costs £100,000 you borrow £100,000).

Usually you'd only get a loan to value mortgage between 75% to 95% (eg if the house cost £100,000 a 75% mortgage means you would borrow £75,000).

The problems with getting a 100% mortgage are:

It will probably cost you a lot more than necessary - you'll be charged a higher interest rate.
You may get tied in - which you want to avoid.
You'll be relying on property prices continuing to rise. If they fall you'll be in a right old pickle called negative equity.
You'll very likely have to pay a mortgage indemnity guarantee policy. This is only good for the lender and doesn't help you.

However if, like many, you don't have enough spare cash and a 100% mortgage is your only realistic option, the good news is that there are some reasonable deals out there.

You've got to shop around to find one. This may be a drag but shouldn't be as difficult if you use an expert see ways to find your mortgage.