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Last Updated: Friday, 5 October 2007, 13:59 GMT 14:59 UK
Question and answer: Mortgages
Pat Bunton
Pat tackles your questions
Your mortgage questions, tackled by Pat Bunton from L&C Mortgage Brokers.

We are thinking of moving and starting a new mortgage. Most of our first initial mortgage is due to be paid off in 2009.

We would like advice as to what's the best option, especially if the market is set to crash next year. Should we stay put or move?

The reality is that no-one can predict accurately whether or not the housing market will crash. Indeed for the last few years doom mongers have predicted a price crash, but to date that has not materialised.

If you view your home as that (and not just as an investment) and you are in the fortunate position of owing little, or no mortgage then to be honest whatever happens you are fine - as even if there were a short-term dip in prices, over the long-term one would expect them recover.

I have an endowment policy for 34,500 with five years left on of 25 year term.

Over the years I paid off all but 3,000 until 2004 when I borrowed back up to 27,000 to build an extension.

I made a mis-selling claim and was told that I was mis-sold my endowment but because of the over payments I had made and the calculation they use to evaluate compensation they say that I am not entitled to any compensation, as my policy will pay off the current mortgage balance.

I feel that I am being unfairly treated. If I not paid anything off I would have received a fairly large sum of compensation but because I have I will not receive anything. Surely this cannot be fair!

I don't know what to say, other than I completely agree with you. The information you have been given is absolutely correct and I am firmly of the view that this is unfair. I think this is an area where the regulator and Ombudsman have got it completely wrong as in my view it is wholly unfair to penalise someone like you, who has taken corrective action themselves - at their own cost.

I purchased my first flat in December 2005, a two-bed flat in Battersea. My income is not nearly enough to get a mortgage for the 225,000 needed so I went joint with my father. I pay the mortgage payments myself but I do have a lodger which covers half my mortgage cost.

Nearly two years since I purchased my flat I am now encountering a number of issues. My father is 60 this year and as a result we can only get a joint mortgage for 10 years. I am joining the navy in October about the time I will be re-mortgaging.

I know nothing about the buy to let market and was wondering if you could help. If it's a buy to let mortgage, do they take income into consideration? Might this be a solution?

If you are going to move out of the property and let it out, then as long as the rental income you get exceeds the mortgage payments due, then you should be able to switch this to a buy to let mortgage, without having to involve your dad at all.

This is because for rental properties the lender's prime concern is that the mortgage is more than covered by the rent.

In contrast, if you live in the property the lenders greatest concern is that your income is sufficient to service the mortgage payments, so in this scenario where you are going to rent the property out it looks as if you should be able to also get around the term problem as well.

I recently phoned up my bank NatWest to enquire whether they hold any interest in my mortgage endowment plan as I was thinking of surrendering my policy to pay off half of the loan. I was told they don't.

They wrote to me stating that my policy is no longer assigned to the bank, on enquiring about this I was told that it is assigned to me now. On further enquiry as to what will happen to my policy now I was informed that it will continue as it is and on maturity the money will be given to me and I will have to pay off the loan, as before the money would have gone straight to the bank to pay off the loan.

What are the implications of this? I have been paying into my endowment since 1993 when I took out the loan (60,000).

In recent years lenders have stopped legally assigning policies as mortgage collateral.

This doesn't affect the policy in any way, but simply means that any payout will be made to you instead of the lender. In turn all you need to do is bank the cheque and write another out to clear your mortgage.

There are no adverse implications for you and the tax treatment of this type of policy is not affected i.e. the maturity proceeds remain tax-free - it is really just a case of lenders cutting down on the administrative cost of assigning and releasing policies every time a borrower takes out, or switches their mortgage.

I cannot find anywhere what protection I would have with an offset Mortgage and a separate mortgage savings account (not a combined current account mortgage).

If the lender was to 'fold' what would happen to my savings, especially if it was greater than 31,000 ? Would it ALL be deducted off my outstanding mortgage balance with the new mortgage provider, or would it be governed by the FSA protection policy, so I would lose some of my savings?

FSA has just changed the compensation scheme rules for deposit takers. They have simplified the calculation so that now the first 35,000 invested is 100% protected. Any savings account, including those linked to a mortgage would be covered.

I have less than five years left on my mortgage, with about 14,000 still to pay off.

My current mortgage is a base rate tracker with the rate being 0.95% above base rate. I pay 300 per month.

I have enough money in other savings, mostly in an ISA, that I could use to pay this off now. The interest rate on the ISA is 5.25%.

I also currently pay 37 per month for endowment insurance due to mature in 2011 and 2013. Due to the poor performance of my endowment policies, I have been overpaying into my mortgage and these policies will not be required to redeem the mortgage at the end of the term.

Should I pay off the mortgage now using my savings? Should I surrender, sell or keep the endowment policies which are not now required for the mortgage?

Bank of England base rate is currently 5.75% so the mortgage rate you are paying is 6.7%. In the simplest terms you are therefore borrowing money at 6.7% and being paid only 5.25% in interest so it is costing you nearly 1.5% to do that. In this scenario, my advice would be to retain enough cash savings to cater for a rainy day and to use any spare cash to pay down the outstanding mortgage.

We may be in a position soon to move to another house. If all goes well we would require a modest mortgage of around 45,000. It is our intention to take this over twenty years. Our grand plan is to pay it off over the next 10-12 years. My understanding is that we require a flexible mortgage (with no penalty fees), could you please advise us of which provider or providers offer us the best deal.

A word of caution here. Most lenders charge a higher rate for a flexible mortgage, so the time to take one is when you are definitely in a position to make use of features, like overpayments.

If you realistically think that might not be possible for a few years then take a traditional mortgage now, to get a lower rate and switch it to a flexible mortgage later, when you are ready to start making the overpayments. Right now, for a loan of your size you can get the best of both worlds though from First Direct, who have a two-year fixed rate of 5.99%, where you get an offset account and can make limitless overpayments.

My daughter has recently benefited from a trust fund from her grandfather and could use this money to pay off her mortgage. She currently has an offset mortgage and has quite bit of cash held in the offset.

Should she pay off the mortgage? Or use the money to offset almost all of the mortgage?

As with the previous question as a general rule you will earn a lower rate of interest on savings than you will pay if you borrow. In its most basic form this is because institutions want to borrow money from you and pay you less interest than they can earn themselves if they lend it on to someone else, at a higher rate. So as a general rule retain enough easy-to-access cash to cater for a rainy day and use the rest to pay down any other more expensive borrowings that you have.

When interest rates rose earlier in the year you showed on your programme interest-only mortgage monthly costs increasing by more than a repayment mortgage.

Can you explain why this is? I was under the impression/ illusion that the interest rate would be the same for both and only the interest part of the monthly cost would be affected.

It is confusing, with an interest only mortgage you simply pay interest, so if you borrowed 120,000 at 10% the annual interest would be 12,000 and your monthly payments 1,000. With a repayment mortgage your payments include interest and capital and the actual rate of interest charged affects the rate of capital reduction.

In simple terms the lower the interest rate charged the faster the capital reduction and this affects the total amount due and therefore the monthly payments. The formula for working out monthly payments on a repayment mortgage is:

Repayment mortgage formula

As you can see - not particularly simple!

The opinions expressed are Pat's and not the programme's. The answers are not intended to be definitive and should be used for guidance only. Always seek professional advice for your own particular situation.


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