There were over 4,500 mortgage schemes to choose from, offered by over 200 lenders – or more accurately around 100 lenders, each with multiple identities. Since the credit crunch hit the UK these numbers have reduced by over 50%.

So how do you choose the best mortgage deal for you and your particular circumstances?. How can you compare a 2 year tracker, with a 2 year discount, a 2 year fixed rate and a 2 year capped rate, if the fees charged are different? What if one of the deals offers a free valuation, and another, free conveyancing?. What if yet another deal has slightly higher fees, but a £500 cashback. What if two of them work on daily interest, and the other two yearly interest?. How important is flexibility?. Will any of them overlook your CCJ for £87 that some awful music club hit you with 4 years ago?. Can you keep your existing property to rent out if you want to?. Will any of the lenders take non-guaranteed overtime into account?. What about a freehold flat? ….

What if the mortage deal that you’d like to take is offered by an obscure Building Society with only one branch, 300 miles away?. They don’t offer an agreement in principle service, but do charge a non-refundable £300 application fee.

One way of trying to sort your way through the maze of schemes is to walk into your local bank or building society and ask them. You may well find though, that you are only offered a mortgage provided by that Bank or Building Society. That may be fine if the deal is competitive, but how would you know?

Worse, you may not meet their lending criteria, and be turned down for a mortgage which would be readily offered by another lender.

Another option would be to assess the whole mortgage market, in an effort to find a) lenders who’s criteria you fit, then b) the best deal from these lenders.

Then, you’d have to contact the lender concerned, and either visit them, to obtain an agreement in principle, or persuade them to visit you. After that you’d complete an application form.

How Mortgage Brokers Choose, then Recommend a Mortgage or Re-Mortgage

They use a mortgage sourcing system.

There are three or four main mortgage sourcing systems in the UK. The software is provided by the developers, who also provide training on it’s use. The systems are updated daily to maintain accuracy. Users can update via their internet connection. Brokers will pay £30-£60 per month for a licence to use the software.

Property, proposed loan, type of mortgage, and applicant information are entered into the software, which then sifts through all available schemes to find those that fit the applicant profile.

Sounds great, but a list of perhaps 2,500 mortgage deals in alphabetical order, is still of no use whatsoever in choosing a particular scheme.

The number of mortgage deals can be reduced by selecting further filters. For example, selecting only fixed rates, with a free valuation. But there may still be a choice of over 500 schemes.

Here’s what I do

After conducting a short mortgage fact find with the applicants, either face to face, or via telephone, I input this information into my mortgage sourcing system.

Unless a particular type of mortgage is specified by the applicants eg. fixed rate, I will search all mortgage types. I select “no extended redemption penalty” as the next filter.

Here’s the good bit. I then ask the software to sort the schemes by “total to pay” over a time period chosen by me – usually 2-5 years. The software, calculates ALL payments made by the borrower for each scheme over this set period of time. It adds any fees, deducts any cashbacks, and takes account of daily, or annual interest.

The result is then a screen with an additional column showing the total payment. In simple terms, the cheapest mortgage deal is the choice. Unfortunately, it’s not that simple to find the best mortgage deal.

Many lenders will apply higher income multiples based on higher credit scores, but will set their criteria for the sourcing system at the highest multiple offered.

The information supplied by lenders, or input by the software suppliers is sometimes incorrect.

Lenders know how the sourcing systems work, and will sometimes manipulate their mortgage deals to come top in the tables. The deals are not neccessarily the best available. Manipulation of this type can include a very low rate for 2 years, followed by 3 years at a further smaller discount. Sorting for true cost over 2 years will probably have this deal in top spot. In reality the borrower is trapped with the smaller discount for the next three years.

In addition, some lenders are efficient at processing mortgages, and some are not. For a remortgage, this doesn’t matter too much, but for a purchase, it can be crucial.

The fact is that the mortgage sourcing systems that brokers use are a tool. Add experience with the system, including criteria selection, knowlege of individual lenders criteria, and the ability to obtain decisions in principle from a variety of lenders, and you have the basis for selecting the best mortgage deal.

Mortgage Problems can be divided into three distinct areas

1. Problems obtaining a mortgage
2. Problems during the mortgage process
3. Problems encountered during the mortgage term

Current problems in the mortgage and property markets are mainly down to the unwillingness of banks to lend to first time buyers.  In more stable time these are the problems, in roughly the order that they are met:

Problems obtaining a mortgage

• Failed, or Low Credit Score
• Not enough income (for a particular lender)
• Income not provable (for self employed)
• Some income not wholly accepted for the employed – for example bonus or commission
• Not enough deposit
• Unable to provide documented address history for the last three years if not on electoral roll
• Existing debt payments reduce income for income multiples
• Outside other lender criteria

Problems during the mortgage process

• Incorrect information supplied for the agreement in principle
• Property values at less than the agreed price
• Further reports required for the valuer
• Lender applies a retention
• Vendors withdraws the property
• Vendor accepts a later, higher offer
• Legal problems
• Lender asks for additional paperwork
• Buildings insurance difficult to obtain

Problems during the mortgage term

• Problems, not noted on the valuation report become apparent
• Change of circumstances mean that mortgage payments are missed
• Problems marketing the property when moving on

How to get a 100% Mortgage

Conventional wisdom has it that you can’t get a 100% mortgage in January 2009, but this isn’t a conventional mortgage blog, so I’m here to tell you that you can if the circumstances are right, here’s how …

First, you need a motivated seller

A motivated seller could be someone who HAS to sell soon because they:

• are facing repossession because they have not been paying their mortgage
• are divorcing
• need to dispose of assets in an estate
• need to relocate
• want to clear their mortgage and unsecured debt before property prices fall further
• are losing money every month on a buy to let

The reason that you need a motivated seller is that they have to agree to drop the asking price by 10%, preferably more. If there isn’t enough pressure on them to go with this, casually suggesting that their property will probably be worth 10% less than it is now pretty soon anyway, might help.

The 10% reduction needs to be off the actual current value of the property, not off what they hoped it was worth.

In practice, the purchase price will remain the same, we have another use for the discount that you negotiated that doesn’t involve depressing sale prices further.

Now you need a lender who is happy to accept a vendor deposit – and they do exist

Next you need an agreement in principle from your lender at the full sale price BUT at 90% loan to value (ltv) assuming that you negotiated a 10 % deposit.

If the property values up ok, the deal is on.

A quick example: You find a property that you would like to buy which is being marketed at £160,000. Doing a little homework, you assess its true market value to be £150,000. You negotiate a price reduction to £135,000 then obtain a mortgage of £135,000 on a purchase price of £150,000 with a £15,000 vendor deposit.

Don’t work about the mechanics of how it works, your solicitor will handle that, but trust me, it does work.

In November 2007 there were 27,000 new mortgage approvals, that’s 76% down on new approvals at the top of the housing market in mid 2007.

The amount borrowed has also significantly reduced, not by 76%, but by 90% from November 2007 to November 2008.

First time buyers are struggling to get a mortgage without a 15% deposit and even then, minor blemishes on their credit records can be a deal killer.

Unemployment and job uncertainty are rising both of which further depress prices.

People exiting adverse credit deals can’t find a lender so are stuck on their existing lenders Standard Variable Rate (SVR) or Libor (not a bad thing in the current low interest rate environment).

Buy to Let properties are being dumped onto the market by now reluctant landlords/investors, as are repossessions which are at an all time high.

Those that are able to purchase are negotiating significant discounts from current valuations based on the assumption that property prices have further to fall.

In short, there is no good news to prop up property prices.

The average price to average earnings ratio has fallen from a peak of 6 x in mid 2007 to 4.4 x now, close to the long term average of 4x. This means that there is a glut of first time buyers who want to get their foot on the property ladder as they see valuations that make their first home affordable. The majority though can’t find a 15% deposit. Those that can are still reluctant to buy, given the probability of another 15% fall in property prices in 2009.

My prediction is exactly that, a further 15% fall this year, followed by a further 7% in 2010. I’m guessing on a low point mid 2010 and house price stagnation for a further year after that.

Best Mortgage Deals

If you are looking for the best mortgage deals or remortgage deals at the moment it will pay to keep your wits about you and get out your calculator. What you’ll find is that most lenders are offering fixed rates or more commonly a fixed rate followed by a discounted rate. Add fees into the equation, many of which are around 2% and working out what the best mortgage deals are becomes difficult.

You need to compare like with like to work out the best mortgage deals or remortgage deals for you, but first a little general info:

For first time buyers, whereas 18 months ago you could get away with the odd small credit problem on your credit file and no deposit; today you are generally going to need a clean credit record and a 15% deposit. A few lenders are offering 90% mortgages, but you may find that they accept very few lenders at this ltv level.

For remortgages, again most deals start at 85% ltv with the best mortgage deals reserved for mortgages under 75% loan to value. There are some great remortgage deals around if you have at least 25% equity in your property, many of which include a free valuation and free legals. One thing that is catching people out here is that they don’t have a realistic idea of the current value of their property. As has been widely reported, property values as an average are down by 16% from a year ago, however new build properties, particularly flats have dropped in value by considerably more.

To work out which are the best mortgage deals for your situation, you first need to work out your loan to value (ltv) which is simply the amount that you need to borrow divided by the value of your property. So for example, if you require a mortgage of £150,000 and the property value is £200,000 your ltv is 75%.

Now decide on the time period for your mortgage deal (not the term of your mortgage itself, just this deal). Often you’ll find that the cheaper deals in terms of monthly cost are over two years, however you need to factor in that you’ll probably have another set of costs to deal with after the two years is up. Generally that doesn’t work out to be very cost effective, so I’d recommend looking at deals with a term of 3 to 5 years. Make sure that any deals you are considering do not have extended redemption penalties which tie you in to the lenders standard variable rate for a period of time after the deal ends.

Once you’ve made that decision, calculate the total payments including any fees (don’t forget conveyancing fees if there is no free legals package) over your chosen time period. Compare these totals to find the best mortgage deals.

A decision in principle certificate will be offered by a lender who a) offers the service, and b) has credit checked, credit scored, and applied their income multiple criteria, to brief information supplied by a potential mortgage applicant.

View your Experian credit report online for free

Subject to the valuation of the property, and the information supplied by the applicant being correct, it’s 95% of the way to guaranteeing a mortgage offer.

A decision in principle should always be obtained as early in the home buying process as possible. It is of little use to anybody, to make an offer on a property, without being sure that you can obtain the required mortgage.

The harshness with with lenders apply credit scoring varies a little, but there is much more variation in the income multiples that they use. For this reason, a potential borrower may pass credit scoring, but have their maximum loan amount restricted. It pays therefore to know that the lender is ok with the income multiples, prior to requesting an agreement in principle.

You can spend an afternoon on line doing it yourself, or simply ask any mortgage broker to do it for you.
Potential bidders on a property, who can produce a decision in principle certificate for the estate agent, will be taken seriously, particularly if they are first time buyers.

If you are unable to obtain a decision in principle, it will usually be for one of reasons:

1.      Failed credit scoring – possibly due to adverse credit that the applicant had no knowlege of.
2.      Insufficient income.

If you fail credit scoring, you need to find out why. You can obtain a copy of your credit reference file. Any adverse credit, that has affected the lenders decision, should show up here. View your Experian credit report online for free

If your income is deemed insufficient, other lenders can be approached, or it may take some financial creativity to make the deal happen. This does not mean lying about your income. Depending on your circumstances, a good mortgage broker may be able to make suggestions to improve your position.

View your Experian credit report online for free

You will usually be offered a choice between three types of valuation

• Mortgage Valuation

• Homebuyers Valuation

• Full Structural Survey

Mortgage Valuation
Most people opt for the standard mortgage valuation as it’s the cheapest option. The purpose of this report is mainly for the lender to ascertain that the property is readily saleable at the purchase price. In other words, that the property offers the lender suitable security for the mortgage.

The valuer is instructed by the lender, often from a panel. The contract is between the lender and the valuer. If the property is later found to have problems, which could, and/or should have been spotted at the time of valuation; you have no right or reason to complain.

You will find perhaps only a paragraph or so, detailing any problems with the property, and recommending any further specialist reports that may be required.

Your mortgage lender will usually make an upfront charge for the valuation, although some deals are available with a free, or refunded (on completion) valuation fee. Typical valuation fees range from £200 for a property valued at under £50,000 to thousands of pounds, for properties valued in the millions. The average range is probably £200 – £600.

Homebuyers Valuation
A homebuyers valuation consists of the standard morgage valuation for the lender PLUS, a further, more in depth report for you. Your report should cover all relevant characteristics of the property. Should the property subsequently be found to have serious faults, the valuer is liable, and their insurance should cover the costs of repairs.
You can expect to pay double the amount of the standard mortgage valuation, for a homebuyers report.
Again, the report may call for further specialist reports.

Structural Survey
A structural survey is usually carried out by a suitably qualified Civil Engineer. Often, the surveyor will concentrate on an area that has been highlighted in an earlier survey. A recent survey that I looked at (I was interested in buying the property) detailed the work required to make good the problems that had caused a 10cm wide crack in the property structure. The surveyor had looked at the property construction, surrounding properties, and the problem area, to build a picture of how the faults came to develop. He concluded that the problem was not progressive (would not get worse) and suggested specific techniques for remedying the problem, together with costings.
A report of this nature, might cost from £500 upwards.

Have an offer accepted

Simple enough, if your offer is the highest, it should be accepted. One frustration that you may encounter here, is the seller, who insists on continuing to market the property after accepting your offer. This is quite common, and requires little effort on the sellers part, other than telling the estate agent, that they want to do so.  All is not fair in Love, War, and Property transactions – you have been warned.

Complete a Mortgage Application

Time is now, not on your side. The Estate Agent, if they are on the ball, will almost immediately want to know who your lender is, and who your solicitor is. They want the sale to progress swiftly and smoothly to completion, so will gently pressure you to get things moving. From your point of view, you would be wise, generally to move quickly too. If you have had the foresight to discuss your situation with a mortgage broker, and have obtained an agreement in principle, it’s now simply a matter of meeting your broker to complete the paperwork. From there on in, the broker should take care of things. If not, you’re going to have to start the process of obtaining a suitable mortgage now.

Obtain a Mortgage Offer

Completing a mortgage application, even after obtaining a decision in principle, does not guarantee that you’ll get a mortgage offer from the lender. Many difficulties can interupt the process. Most commonly, these would include: problems with the valuation, inability to provide the supporting documentation required by the lender, discrepencies between the information supplied on the application form, and the documentation that you provide, inability to PROVE ID, or address.

Common examples are: the property is valued by the valuer at less than the price offered, no wage slips or P60 available, accounts not finished, thinking that your “salary” includes overtime and/or bonuses/car allowance, driving licence still shows old address, no passport.

Appoint a solicitor

In reality, you should have done this before completing your mortgage application, in fact, you will not be able to complete your mortgage application, without knowing your solicitors details. In practice, you will have little contact with your solicitor, until the lender sends her a copy of your mortgage offer. Even then, unless you instructed the solicitor to apply for the “local searches” straight away (a speculative move which involves cost, before a mortgage offer has been obtained), a few more weeks will pass before your solicitor requires your prescence.

Exchange contracts

When both your solicitor, and the vendors solicitor have completed all of the legal work, you are ready to “exchange contracts”. This involves you agreeing to purchase the property, as defined in the legal paperwork, for a set sum of money. The vendor, in turn agrees to sell you the property, similarly defined. A date is agreed for completion

Now the game begins, or if you would rather not treat it as a game, now the stress starts. It is helpful to realise at this stage that there’s a reason why it’s called the “housing market”. Property vendors (sellers) want the best price that they can get, whilst sellers would like to pay the lowest price possible. Ultimately, it’s helpful to both parties, to agree a reasonable price.

What constitutes a reasonable price, will vary with the location and type of property, the property condition, the number of people interested in the property at any given time, current economic conditions, and the price asked.

Further, the market for property is not static, instead, it changes almost daily. Imagine buyers and sellers as being lined up opposite each other on conveyor belts. New people, and properties are being added to the coveyor belts daily. At the same time, other people and properties are being removed.

If you are a seller, you want the conveyor belt opposite you to be full of people – i.e. lots of buyers in the market. You also want your conveyor belt to have few properties on it – i.e. few sellers. This guarantees plenty of viewings and a probable “bidding war”, with prospective purchasers trying to outbid each other to secure your property.

If you are a buyer, you want the opposite – i.e. many sellers, and few buyers. This means that you can place a few low bids on the properties that you like, in the knowlege that one seller will probably cave in, and agree to a bargain price.

Recognising what type of market you are in, is therefore a primary consideration. Bear in mind that the micro market – i.e. the local market, may be entirely different to the macro market – i.e. a regional or national market.

Also be aware that there may be a temporary uneven-ness in the ratio of buyers to sellers that may quickly pass.

Overall – decide on the price that you are prepared to pay, and try not to deviate from this too much.

In today’s market conditions I’d suggest going in low, perhaps around 15 – 20% lower than the asking price as an initial bid. It will probably get refused, but you never know, you might have just bumped into a motivated seller.

Repayment mortgages are the “traditional” type of mortgage. Each monthly payment that you make to the mortgage lender covers the interest charged, and also repays some of the capital borrowed.

The lender works out a level mortgage payment for you based on the mortgage term. This means that in the early years of your mortgage, you are mostly meeting interest payments, and the outstanding capital balance reduces slowly.

As the capital balance reduces though, less of your payment goes to meet interest, and more goes to pay off capital. So your mortgage reduces quicker, as time goes by.

The good thing about a repayment mortgage is that your debt will reduce to zero, over the mortgage term, provided that you meet the requested payments on time.

Also, the equity in your property will increase over time, even if the property doesn’t increase in value.