Some mortgages that claim to be “flexible”, only offer some of these characteristics. If you are interested in a “flexible” mortgage decide whether all or only some of the characteristics are important to you. You can then use our Mortgage Wizards to search out mortgages that have the characteristics you want. The most common requirement people have is simply the ability to make penalty free overpayments. If this is the only flexible feature you want, a penalty free mortgage will be just as suitable as a flexible mortgage and so you should consider both options.
Even mortgages marketed as “fully flexible” often have different features. For example, some flexible mortgages may allow a draw down of extra funds, a payment holiday or underpayments from day one of the mortgage. Others will only make funds available for these options from overpayments already made, or will require the mortgage to be satisfactorily conducted for a specified period, say 6 months, before some or all of these options become available.

The other point to consider is that with most lenders there will be a large Mortgage Indemnity premium to pay in connection with a 100% advance. This is the premium that lenders charge for high percentage lending. This premium is used to buy insurance cover for the lender which will protect them in the event that you default on the mortgage, they repossess the property and they make a loss when that property is sold. This insurance is of no benefit to you the borrower but nevertheless you will be required to pay the premium. What is worse is that if the scenario outlined here actually occurs and the insurance guarantee is called upon by the lender then the insurer can still come after you, the borrower, to recover the amount they have paid out.

The other way to look at 100% finance is to apply for a 95% mortgage but go for one of the deals which offers a cash back on completion. There are deals available currently which will give 5% or 6% of the mortgage back on completion which represents the deposit required. This has the advantage of reducing the mortgage indemnity premium by about half and you should obtain a better interest rate. The only snag with proceeding down this route is that you will need to find the 5% deposit temporarily as you will need to pay this when you complete whereas you will not receive the cash back until after completion.
The third and final option is to take a 95% mortgage and arrange a top up through a second lender for the balance. Some brokers will have schemes to cater for this and this can mean that you achieve a cheaper rate on the 95% mortgage although you may have to pay slightly more on the 5% top up. However, when the two rates are averaged out over the whole mortgage there are some quite attractive deals to be had. Always remember to check out all the fees and be clear which of these fees you need to pay yourself and which can be added to the mortgage.

Much is written about the different merits of each type of mortgage and the choice will depend greatly on your own personal circumstances, your attitude towards risk and other factors. There are, however, some basic facts about each type of mortgage which may assist you in making up your mind. If you are still undecided then you could talk to an Independent Financial Adviser, mortgage broker or direct to some of the lenders. They should be able to help you to form an opinion but, remember, always talk to three or four people and get several alternative quotations.

ENDOWMENT MORTGAGES - An endowment mortgage is basically an interest only mortgage which is supported by an endowment policy. During the term of the mortgage you will only pay interest to the lender so the outstanding mortgage debt will remain constant throughout the mortgage term. In addition to the interest you pay to the lender you will also need to pay premiums into an endowment policy.

An endowment policy is basically a savings plan which is designed to produce the mortgage amount at the end of the agreed term (normally 25 years but can be shorter). Most endowment policies taken out in connection with a mortgage do not guarantee to repay the mortgage debt at the end of the mortgage term so there is a possibility that there could be a shortfall. The eventual value of the policy will depend on the performance of the fund in which your premiums are invested so poor performance could result in the eventual maturity value being insufficient to repay the mortgage debt. On the other hand, however, a fund that performs well could produce a ,maturity value which exceeds the mortgage amount and this surplus would then be paid over to you. Most new policies, these days, build in a regular review of the policy performance so that any anticipated shortfall can be dealt with at the earliest stage. This may mean increasing the policy premiums or taking other action to cover any projected shortfall but provided the recommended action is taken the policy should be put back on track.

In addition to the investment value of the endowment policy it will also provide life assurance cover for the policyholder which will repay the mortgage in the event of death within the policy term.
The final point to consider when taking an endowment mortgage is that the endowment policy is designed as a long term investment and the policy will be designed to be run for the full term. Whilst policies have become more flexible in recent years they will still represent poor value for money if surrendered in the early years and you could find that you get back less than you have invested.

PENSION MORTGAGES - Pension mortgages are again interest only mortgages but this time supported by a pension plan rather than an endowment policy. As with the endowment mortgage you will pay interest only to the lender and at the same time you will pay premiums into a pension plan. This is only an option for someone who is either self employed or in non-pensionable employment.
The most common type of pension plan to be used is a personal pension plan and this will be designed to pay a tax free lump sum on retirement in addition to a monthly pension income. It is the lump sum (or part of it ) which is then used to repay the mortgage debt on retirement.
The advantage of this type of repayment method is that the pension contributions attract tax relief at the persons highest rate of tax. This means that for a 40% tax payer every £100 of contribution only costs £60 from net pay. In addition the pension fund itself benefits from certain tax breaks and so it should grow at a faster rate than other forms of investment. However, it is also important to remember that unlike an endowment mortgage, a personal pension policy does not provide automatic life assurance cover and this will need to be arranged at an additional cost.

PEP MORTGAGE - A Pep mortgage is again an interest only mortgage with the lender accepting interest payment only during the term of the mortgage. Once again the level of the mortgage debt will remain constant throughout the mortgage term.
In addition to the interest payments made to the lender premiums will also be paid into a Personal Equity Plan which is designed to return the mortgage amount at the end of the mortgage term or before. However, there are no guarantees attached to the future performance of the Pep fund so the monthly premium is calculated by making assumptions about future growth rates. It follows, therefore, that under performance of the fund could result in a shortfall at the end of the mortgage term. On the other hand a better then predicted performance could result in early repayment of the mortgage debt or a surplus at the end of the mortgage term.
It should be noted that a Pep does not include any element of life assurance cover and as such this needs to be taken as a separate policy if it is required.

With this type of mortgage, provided all the due payments are made on time, the mortgage is guaranteed to be repaid at the end of the mortgage term. In addition it is often possible to either reduce or extend the term of the mortgage from that chosen originally. This can be important if, say, interest rates were to rise making the repayments difficult to meet. Most lenders will, in these circumstances allow the mortgage term to be extended temporarily which will help to alleviate the problem until such time as the increased commitment can be met or interest rates decrease again. At that time the mortgage term can be adjusted down again to the original remaining term. On the other hand some people may find themselves with additional spare cash each month which they would wish to use to pay the mortgage off more quickly. Again, in these circumstances most lenders will agree to reduce the term of the mortgage to allow it to be repaid more quickly.

The amount that you will be able to borrow will be related to two factors. First lenders will have a maximum percentage of the property price/value that they are prepared to lend. This is shown as the maximum loan to value (LTV) and is a non-negotiable figure. In general terms the maximum LTV will reduce as the property price increases - i.e. a lender may be prepared to lend up to 95% on a property valued up to £60,000 but will then reduce the maximum to 85% up to £100,0000 and maybe 80% over £100,000.

The second factor which will govern the amount you can borrow is your income. Lenders will generally have a set formula for working out how much they are prepared to lend in relation to your income and this will be expressed as a multiple of income - i.e. 3 times a single salary or 2.5 times joint salaries. However, two lenders with the same income multiples will not necessarily arrive at the same maximum figure as, in many cases, the amount of annual income can be interpreted in different ways and some lenders are more flexible than others. For example, if part of your income includes bonuses, overtime, or commission then most lenders will take 50% of these payments into account when arriving at the salary amount. However, some lenders may be more generous than this and take a larger percentage, particularly if you can show that this is a permanent feature of your income and you can show a long track record of receiving these payments. As a general rule of thumb, however, it is sensible to expect lenders to take 50% of these payments if they are regular but not guaranteed. If these payments can be shown as being guaranteed and part of your contractual arrangements then many lenders will be prepared to take all the additional sum into account.

The other area where lenders can differ in their interpretation of the amount of mortgage available is if you have credit or other debts outstanding. Many lenders will deduct the annual payments in respect of any credit agreements from annual salary before applying their income multiple. If you have any existing commitments such as bank loans H. P. or you pay maintenance to an ex-spouse then you need to deduct these payments from your annual salary before applying the multiple. Here again, however, some lenders will be more flexible than others.

To summarize you will find that the maximum LTV quoted is a non negotiable figure but many lenders are open to discussion and negotiation on how the income calculation is applied.