In the past UK consumers have used mortgage equity withdrawal to finance spending. But, this remortgaging is becoming more difficult due to stagnating house prices and more expensive mortgages. Instead it appears consumers are taking out unsecured loans.

However, this threatens the viability of the economy because it leaves consumers very vulnerable to any downturn in the economy and rise in unemployment.

Earlier this week, NatWest, Royal Bank of Scotland and Kent Reliance Building Society became the first lenders this year to raise their variable mortgage rates for existing customers. This is putting pressure on the Bank of England to cut rates next month. However, even a cut of 0.25% to 5% is unlikely to lead to lower mortgage payments for consumers, but it will help prevent increases

Britain’s binge on credit as mortgage become expensive at Telegraph

With big banks offering less competitive mortgages, the best deals can often be found at smaller building societies who rely on saving deposits to fund mortgage payments. This is a complete list of building societies in England and the UK.

However, due to the unprecedented increase in demand many building societies are now also running out of saving deposits to finance mortgages. Therefore, even the smaller building societies are having to withdraw mortgage products and increase interest rates.

However, the most competitive rates can still often be found at the smaller building societies. A report by Moneyfacts suggested that:

the top 10 mortgage lenders, (who have a total of 75 percent market share) accounted for only 27 percent of the 250 most competitive mortgages on offer in March.

To qualify you need to have a Graduate Plus current account. The Graduate mortgage includes:

• Borrowing upto 4.5 times income. However, this depends on affordability. If you are making student loan repayments this will count against you.
• For normal mortgage products a deposit of only 5% is required. This is good with lenders such as the Nationwide insisting on 10% deposit.
• Choose from fixed rate mortgages, tracker mortgages or variable mortgages. These all come without any extended tie in period, meaning that you can remortgage to another company in a few years.
• Interest is charged daily.
• The tracker mortgage enables a degree of flexibility and you can overpay without incurring a fee. However, there is a fee for overpaying the fixed rate or variable mortgage
• Option of home start – years of interest only payments
• There is no exit fees
• No tie in period

• A mixture of capital repayment or interest only mortgages.

Home Start Mortgages

This mortgage product gives reduced payments for the first 3 years. It means that the total cost of the product is higher, but the lower payments are usually desirable when you first buy your home as this is usually when money is at its tightest.

Where appropriate they will pay

• Any enquiry fee charged by your current lender (note an enquiry fee is not the same as a mortgage exit fee, you may still be eligible for some fees.
• The standard valuation fee for your property
• A Completion Fee which is charged to transfer funds to your previous lender on successful completion of the remortgage
• Any district Land Registry search and registration fees

Mortgages at HSBC 

 3 Times Salary. The traditional model of mortgage lending was a simple income multiple of 3 times salary. With current long term interest rates at a low level, this would provide a mortgage that is quite affordable for the average homeowner.

4 Times Salary. An increasing number of high street banks are offering mortgages upto 4 times salary. Mortgage lenders that will lend 4 times salary include:

• HSBC
• Halifax
• Nationwide. The more you earn, the higher income multiple which will be lent. For example, if your income is £20,000, they will lend £76,000. If your income is £30,000, they will lend £120,000. If your income is £50,000, they will lend £215,000

5 Times Salary Mortgages

According to the Halifax mortgage calculator. They would lend £150,000 to someone on a £30,000 income. However, this requires having no outstanding credit card debts and no children. Also, it is just a guide

The key here is the issue of affordability. If you have low monthly outgoings, the payments on a 5 times mortgage multiple can be affordable, if you have credit card payments and high outgoings, it can become too expensive.

Future of interest Rates

A key factor when deciding how much salary to borrow is the future of interest rates. For 2008 and 2009, interest rates are likely to remain low. It is hard to see interest rates rising significantly.

Firstly to Reduce Mortgage Payments

1. Extend Mortgage Term – Longer repayment period means lower monthly payments, but higher total cost.
2. Interest Only – Means you only pay interest payments and not capital repayments. Cheaper monthly repayments. But, need to find an alternative means of paying off debt.
3. Remortgage to Cheaper Deal. At the end of your mortgage introductory offer, try remortgaging. As long as you don’t have high repayment charges move it to the best deal. Spend time to find most attractive deal, it can save £100s each month.

Reduce Total Cost of Mortgage

1. Make extra Lump Sum Payment. Making extra lump sum payment will reduce the total cost of your mortgage quite significantly. The earlier you pay it, the greater the cumulative impact it will be. Not only do you reduce capital payments but also compounded interest payments.

2. Making Extra Monthly repayments. If you have a flexible mortgage, you can make extra monthly payments. This extra payments will go 100% to reducing the capital rather than 90% towards interest. This is a powerful way to reduce your mortgage

3. Reduce Mortgage Term. Reducing the mortgage term will have a significant impact on reducing total cost of mortgages.

A £100,000 mortgage would cost:

• £239,508.90 over 30 years
• £212,033.76 over 25 years
• £186,071.74 over 20 years
• £161,789.09 over 15 years

• Best Current UK Mortgage Deals

However, you may have a cause for complaint, if your bank has increased the early repayment penalty without adequate notice. Recently the FSA found that many banks were guilty of increasing early repayment charges by more than was reasonable. In this case it is worth writing a letter of complaint and trying to get a refund for the difference. With many banks already having paid out, you have a good chance of getting your money back.

Avoiding Early Repayment Charges on Mortgages

Because early repayment charges on mortgages can be so high it is best to choose a flexible mortgage which gives the option for making extra payments without any charge. If there is any chance you might be able to pay off your mortgage early, read carefully any details of repayment charges.

1. Pay off a Mortgage As Quick as you can.

The sooner you can make extra mortgage payments the better off you will be. Here there are a few examples of how an extra payment of £1,000 at the start of your mortgage term can make a big difference to reducing the total cost of your mortgage. Note, making extra payments to your mortgage is often a much better investment than saving money in a bank for your retirement. However, if you are a first time buyer with a large mortgage, you may find that your mortgage payments take up a high % of your monthly income and therefore, it is very difficult to make extra mortgage payments, in these circumstances it may be wise to even have a longer mortgage term to keep your mortgage payments realistic. We can’t say the ideal mortgage term because it depends on individual circumstances, but the general principle is to keep the repayment term as short as reasonable.

2. Make Use of Your Current Account.

Current account mortgages have become more popular in recent years and with good reason. They are particularly advantageous for homeowners with sizeable savings in their current account. Current account mortgages are also called offset mortgages because any savings in a current account are automatically used to reduce your mortgage balance. Therefore your savings are automatically used to reduce your mortgage balance and save you interest payments. As a further advantage you will not have to pay tax on interest from your bank account.

3. Avoid Lethargy.

Many millions of homeowners pay more than they need to simply because they don’t take advantage of the opportunity to remortgage to a better deal. Mortgage lenders invariably charge a higher interest rate to loyal customers. However, as soon as you indicate a willingness to move they will offer you a better deal to keep you. As soon as an introductory deal ends check out the various different options and move your mortgage to the lowest paying account.

4. Mortgage Insurance.

To guard against temporary losses of income it is important to have some kind of insurance. This can either be a direct mortgage insurance which protects your mortgage payments or you could choose insurance which gives you a general income in case of losing your job. Unlike home insurance, Mortgage insurance is not required, but it is highly guaranteed to avoid repossession.

5. Be suspicious of Deals too Good to be True.

The media has extensively covered the subprime mortgage problems, in particular the problem has involved badly sold mortgages. These are mortgage products which have attractive introductory deals but then become very expensive. As with any financial product it is important to understand all the implications and small print. If you take out a mortgage make sure you know what happens when any introductory deal ends. In particular, look for mortgages where it is easy to move to a better deal after a certain time; it is best to avoid any deal which ties you down to long periods with one mortgage dealer.

6. When is A mortgage better than Renting?

In the long term buying a house with a mortgage offers a long term investment. At the end of your mortgage term, you will have an asset and can live rent free in your retirement. Therefore, if you can afford the extra cost of mortgage payments then a mortgage is more desirable than renting. However, if you find it too difficult to get a mortgage or the mortgage payments are too high, it is worth saving towards a bigger deposit. In an era of stagnating prices it will hopefully become easier to afford a mortgage in a few years.

7. Interest Only Mortgage?

An interest only mortgage means you have to find another investment scheme to pay off your capital mortgage. In practise it is favoured by people who wish to keep their mortgage payments as low as possible. It allows for greater flexibility in contributing towards another investment scheme. The danger is that homeowners can fail to make sufficient alternative investment decisions meaning at the end of 30 years you still owe money.

8. Equity Withdrawal / Loan consolidation

One benefit of having a mortgage is that you can use your equity to take out more borrowing. This extra mortgage lending is typically at a much lower interest rate than other types of borrowing. For people with expensive debts such as credit card loans, this can save alot of money in interest payments. However, equity withdrawal is not without its dangers, especially if house prices fall. It does make sense to consolidate expensive loans, but bear in mind you should try to solve the problem of excess spending and debt rather than just pile it onto your mortgage and create potential for loan defaults in the future.

9. Independent advice

If you are bewildered by all the options and advice it makes sense to take advantage of independent advise. Mortgage brokers can help you find the best mortgage product. They will either charge you directly or take a commission from the product that they sell you. Mortgage advice can be found online or on the high street.

10. Don’t lose Your mortgage

Once you have a mortgage it is important to avoid defaulting. This requires careful planning and avoiding overspending and accumulating unnecessary debts. See some tips for a frugal lifestyle here.

• Daily Interest Calculation. Interest is calculate daily rather than at the end of the year. This means that as you pay off your mortgage throughout the year, the interest payments are reduced.
• Overpayment. This option allows you to make an overpayment, either as a lump sum or regular payment. This can be more beneficial than saving into a current account. The interest on a loan is greater than in a savings account. These overpayments can be used to pay off your mortgage quicker of they can also be used to build up an overpayment fund which will finance future periods of underpayment. Making faster mortgage payments
• Payment holidays. The coop allow you to arrange a payment holiday for upto  6 months. This can be beneficial for particular events which are very expensive, such as having a new baby.
• Further Advance. A further advance enables you to borrow extra amounts than the original amount. It is a way to remortgage and gain equity withdrawal.
• The key to a good flexible mortgage is that there should be no hidden charges for early repayments or making extra payments

See also: How To pay off mortgage fast

Related

Flexible Mortgages at Alliance & Leicester

Flexible Mortgages at Scottish Widows

Flexible Mortgages at Co-operative Bank

Income Multiple. The simplest guide to mortgage lending is using a simple income multiple. In an era of higher interest rates, the traditional income multiple was 3 times income. Thus on the average UK salary of £30,000 you would be able to get a £90,000 mortgage. However, in recent years, these income multiples have been stretched, especially for young graduates and professionals. It is not uncommon for the big mortgage lenders to offer upto 4.5 or even 5 times income. For example, the Bristol and West professional Mortgage enables borrowing of upto 5 times individual income or 4.5 times joint income. This is one of the best criteria for borrowing a large amount.

Affordability. Another criteria for mortgage lending is affordability. This takes into account not just income but regular outgoings like other debt payments. Therefore, if you have low overheads and no other debts the amount lenders will give will be much higher. Abbey offer a mortgage

Other Routes. If you really wish to borrow more, some lenders take the self certification route.  Self certification mortgages do not require you to prove income, but it can be dangerous to exaggerate income

• Top 10 Mortgage Lenders
• Making faster Mortgage payments 
• Mortgage Options when struggling with repayments 
• Abbey Mortgage calculator – This gives a guide to how much you can borrow from a mainstream mortgage lender