Money Tips Network

Traditionally, building societies have been the main providers of mortgages but now their hold on the market is challenged by banks and insurance companies. This competition has meant an end to the old days of ‘mortgage famine’ when borrowers were forced to go cap in hand to their building society manager. Now many institutions will lend three (and even four) times an individual’s annual income. If a couple are buying a house, the lower of the two incomes will be added to three times the higher (i.e. if one person earns ?10,000 and the other ?8,000, the possible total will be ?30,000 + ?8,000 = ?38,000). However, some may expect the buyer to provide a deposit of around 5 to 10 per cent of the purchase price.

For amounts over 80 per cent of the value of the house, the building society will demand that the buyer insures against default by paying a one-off premium to an insurance company. Note that the building society will offer a loan, based on their valuation of the house, or the agreed sale price, whichever is the lower.

If the price of the house is over ?30,000, stamp duty of 1 per cent is payable, a particular penalty on London house buyers where even broom cupboards cannot be bought for under ?30,000.

There are different types of mortgage agreement – the best-known being the repayment mortgage, under which the monthly payments are structured over the lifetime of the loan so that at the end of the period both interest and capital have been repaid. Over the first few years of the mortgage, very little of the capital is repaid. This can surprise home buyers who sell their houses after a few years.

An alternative to the repayment mortgage is the endowment mortgage. At the same time as the borrower takes out the mortgage, he or she takes out a life insurance policy with a monthly premium payment. At the time that the mortgage ends, the insurance policy matures and repays the full amount of the loan. In the meantime, the borrower has paid interest but not capital each month to the building society. The tax benefit is thus retained throughout the life of the loan. There are two further advantages of endowment mortgages. One is that if the borrower dies, the loan will be repaid in full. The second is that the policy can be transferred from house to house as the borrower moves. Some endowment schemes offer a bonus in addition to the amount needed to repay the mortgage, but the premium payments on such a policy are somewhat higher. And there is always the risk that the life assurance company will prove to be a bad fund manager, and thus the final bonus may be disappointing.

A pension mortgage is similar in principle to an endowment mortgage. In return for extra payments, not only is the house price repaid, but a sizeable income is accumulated. This is a particularly useful scheme for those people who are self-employed and who do not benefit from an occupational pension scheme.

House buyers should be cautions before choosing an institution just because it offers the lowest rate. The lender has no obligation to keep the rates competitive for the full twenty-five years. If they decide they do not like the market, they may no longer undercut their rivals. In contrast, building societies will always have to be competitive because their main business is mortgage lending.